Continuing Uncertainty about the Inflationary Impact Ahead of Higher Tariffs – Currency Thoughts

Continuing Uncertainty about the Inflationary Impact Ahead of Higher Tariffs

July 18, 2025

Overnight financial market movements have been generally limited.

• There is a softer dollar, down 0.6% against the Australian and New Zealand currencies, 0.4% verdus the euro and Swiss franc and 0.2% relative to the Canadian dollar and sterling.
• Ten-year sovereign debt yields have risen two basis points in Germany, Great Britain, Italy, Spain and France but fallen three basis points in Japan and a single basis point in the case of the U.S. 10-year Treasury.
• U.S. stock futures have seen minimal net change. Share prices closed up 1.1.3% in Hong Kong, 1.2% in Taiwan and 0.5% in China but fell 0.6% in India and 0.2% in Japan. European equities are flat to a touch higher.
• After edging above $120,600, profit-taking has depressed Bitcoin to a net 0.4% decline. House approval assures that the first and controversial regulatory U.S. law for crypto currencies is about to get signed.
• Gold and oil prices have respectively firmed 0.4% and dipped 0.2%.

In a speech last night, Federal Reserve Governor Chris Waller, who is considered a front-runner to be appointed the next Fed Chairman, double-downed on arguing that the inflationary effect of higher tariffs will be a one-off event, and asserted his belief that the federal funds target range is currently at least a full percentage point too high. Waller did not dissent from any of the four interest rate decisions during the first half of of 2025 to keep the target range unchanged, but in March he did want a slower rate of balance sheet reduction than the majority approved. Waller has additionally cited slower private sector employment growth in defending his recent conversion to an outspoken interest rate dove.

Inflation data reported around the world has not depicted a sudden acceleration that can yet be traced to the unfolding trade war. This in part can be attributed to the great uncertainty regarding how much tariffs will actually rise and how long such will be kept at the new levels. Another countervailing factor has been the drop in energy prices caused by gloomier global demand prospects. Japanese consumer prices in June released today, showed a 0.1% overall monthly dip and unchanged core consumer price index. The 12-month increase in total and core inflation, which in Japanese reported excludes fresh food but not energy, was 3.3%. The 12-month rise in the energy component has decelerated from 9.3% in April to just 2.9% as of June, and Japanese consumer price inflation, excluding both energy and food, increased to a 17-month high of 3.4% in June.

Today’s release of German June producer price data revealed a 1.3% overall year-on-year decline, the largest 12-month drop since last September and embodied a 6.4% slide in energy costs that outweighed a 1.3% on-year collective rise in other elements of the index.

Euroland’s current account, which is dominated by goods trade but includes services, investment income and transfer payments as well, remains comfortably in surplus and a contrast with America’s chronically large deficit. The seasonally adjusted surplus in May of EUR 32.3 billion rebounded fully from the EUR 18.6 billion surplus in April, and the unadjusted surplus during the past 12 reported months, equaled 2.2% of Euroland GDP, similar to the 2.5% surplus-t0-GDP ratio during the year ending in May 2024.

In another sign of better euro area economic activity, average construction output in April and May was 2.9% above the first-quarter mean.

The business sentiment index of Hong Kong printed at -8, just a point above the second quarter’s reading of -9 and -10 in 1Q 2025.

Malaysian GDP contracted in the second quarter but recorded on-year growth of 4.5%. Malaysia’s trade surplus in the first half of this year was 16% smaller than the surplus in 1H 2024.

U.S. housing starts and the U. Michigan index of U.S. consumer sentiment will be reported later this morning

Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

Tags: Euroland current account and construction output, Fed Governor Waller, German producer prices, Japanese consumer prices

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on Friday, July 18th, 2025 at 5:47 am and is filed under New Overnight Developments Abroad – Daily Update.
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