UK is caught in a fiscal vice, squeezed by a shaky balance sheet and hard tax choices

EU Mid-Market Update: UK is caught in a fiscal vice, squeezed by a shaky balance sheet and hard tax choices; Investors (and Trump) await Fed Chair Powell's speech.

Notes/observations

- UK public finances data reinforces dire state of govt balance sheet, with analysts suggesting the Chancellor would need to cut spending by >£20B or raises taxes at Autumn Budget Statement to fill the gap (Note that Labour party pledged to NOT raise taxes). BOE is stuck in a bind of low to flat growth and stubborn inflation. UK Kantar survey showed grocery inflation for last 4 weeks at 5.2% v 4.7% last month. Gilts are underperforming. GBP/USD is higher, helped by weaker US dollar since beginning of week.

- Although macro focus is fixed on next week, with US GDP figures and Fed decision, some attention given to Fed Chair Powell's remarks today at 08:30 ET, although its content might be muted given, we are in the Fed blackout period. BOJ decision next week, financial press reports BOJ set to delay rate hikes until clarity on trade war front.

- Deutsche Bank analysts expect US 30-year yield to jump 50bps on any Powell exit, but history suggests the move on 30-year might be even higher; Markets have learned that each routine Fed chair nomination since 1970—Burns, Miller, Volcker, Greenspan, Bernanke, Yellen and Powell—has triggered an average 65 bp rise in two-year yields and a 49 bp rise in ten-year yields within three months.

- Given the muted reception of Grok4 and OpenAI’s new agent alongside tempered expectations for ChatGPT-5, some investors are refocusing on Capex discipline as FCF burn reaches unsustainable levels. Press reports that "Stargate AI" project in Ohio may have been scaled back to a 5–10 MW micro-data-center; Meanwhile, KAIST’s Monte Carlo Tree Diffusion breakthrough integrates structured search into diffusion planning, advancing resource-efficient, high-performance AI reasoning for real-time applications.

- Notable US premarket earnings include AVY, DFX, DHI, DHR, GM, GPC, HAL, IPG, KEY, KO, LMT, PCAR, PHM, PM, SHW, SSL, THC.

- Asia closed mixed with KOSPI underperforming -1.3%. EU indices -0.8% to flat. US futures -0.3% to flat. Gold -0.2%, DXY 0.0%; Commodity: Brent -0.7%, WTI -0.7%; Crypto: BTC -0.4%, ETH -3.5%.

Asia

- Australia RBA July Minutes noted that majority felt prudent to await confirmation on inflation before easing. Felt cutting rates three times in four meetings would not be 'cautious and gradual'.

- South Korea Jun PPI Y/Y: 0.5% v 0.3% prior.

- New Zealand Jun Trade Balance (NZD): 0.1B v 1.1B prior;

- Japan Fin Min Kato reiterated view that government saw consumption tax cut as not appropriate.

Europe

- Bank of England (BOE) said to have been 'urged' to hold back long-dated bonds from the market. Considering scrapping plans for a digital Pound for households amid growing skepticism over the project’s benefits.

Americas

- White House Press Sec reiterated that Pres Trump had no plans to fire Fed Chair Powell; not worried about deficit due to tax cut Bill.

- Goldman Sachs analyst saw three 25bps Fed rate cuts this year in Sep, Oct & Dec.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.42% at 544.28, FTSE -0.09% at 9,009.59, DAX -0.76% at 24,113.83, CAC-40 -0.54% at 7,756.38, IBEX-35 -0.02% at 14,024.63, FTSE MIB -0.18% at 40,095.00, SMI -0.52% at 11,867.59, S&P 500 Futures -0.10%].
Market Focal Points/Key Themes: European indices open generally lower and remained under pressure through the early part of the session; reports that EU is looking into countermeasures in the advent of not reaching a trade deal with the US seen weighing on market sentiment; among sectors managing gains are communication services and telecom; sectors leading the way lower include technology and consumer discretionary; Sanofi acquires Vicebio; Compass acquires Vermaat; Vallourec sells its Deville-les-Rouen site to Vinci; reportedly UniCredit to increase stake in Commerzbank; Centrica takes stake in Sizewell C; earnings expected in the upcoming Americas session includes Halliburton, Coca-cola, General Motors and Northrop Grumman.

Equities

- Consumer discretionary: Compass Group [CPG.UK] +5.0% (trading update; acquisition).

- Energy: SMA Solar Tech [S92.DE] -1.5% (prelim results), Norsk Hydro [NHY.NO] +3.0% (earnings) - Financials: Munich Re [MUV2.DE] -0.5% (prelim results), Julius Baer [BAER.CH] -2.0% (earnings) - Healthcare: Astrazeneca [AZN.UK] -0.5% ($50B investment in US) - Industrials: Maersk [MAERSKB.DK] -1.0% (peak season surcharge to scope China etc.) - Technology: ASML [ASML.NL] -2.0% (OpenAI said to be in contention with SoftBank over Stargate AI Ohio based project) - Materials: Akzo Nobel [AKZA.NL] -3.0% (earnings), Givaudan [GIVN.CH] -6.0% (earnings).

Speakers

- ECB Bank Lending Survey noted that Q2 bank lending conditions were stead while housing loan demand rose.

- BOJ said to likely keep policy steady at the July meeting. Saw little impact from recent Upper House election. Said to see upward price risks if there is big fiscal loosening.

- China Forex Regulator (SAFE) noted that supply and demand in FX market was basically stable; Did not see ‘irrational’ trading activities now. No one-sided expectation for yuan (CNY) appreciation, depreciation.

- China Foreign Ministry Official Guo reiterated had no information on US Commerce Dept employee (**Note: : Refers to an incident where a U.S. citizen employed by the U.S. Patent and Trademark Office was barred from leaving China.).

Currencies/fixed income

- USD trying to stage a mild recovery as concerns over US tariffs eased after comments from Treasury Sec Bessent. Noting that the Trump administration was "more concerned with high quality" trade deals, than getting deals done by August 1st

- EUR/USD hovering around the 1.17 level with focus on Thurs ECB rate decision.

- GBP/USD was softer after Jun Public Financing data prompted some concerns over the UK fiscal matters and speculation of even further of tax hikes this autumn.

- USD/JPY at 147.70. Dealers noted All future bills and budget proposals, including a supplementary budget for autumn, are unlikely to pass without opposition party support. There's a risk of the administration conceding to the opposition's expansionary demands.

- 10-year German Bund yield at 2.62% and 10-year Gilt yield at 4.63%. 10-year Treasury yield: 4.38%.

Economic data

- (NL) Netherlands Jun House Price Index M/M: 0.9% v 0.6% prior; Y/Y: 9.3% v 9.7% prior.

- (FI) Finland Jun Unemployment Rate: 9.9% v 10.5% prior.

- (UK) Jun Public Finances (PSNCR): -£16.1B v +£21.0B prior; Net Borrowing (PSNB): £20.7B v £17.5Be.

- (MY) Malaysia July Foreign Reserves: $120.9B v $120.6B prior.

- (ZA) South Africa May Leading Indicator: 111.3 v 112.7 prior.

- (FR) France Jun Retail Sales Y/Y: -1.1% v +0.2% prior.

- (PL) Poland Jun Real Retail Sales M/M: -1.8% v -3.2% prior; Y/Y: 2.2% v 3.9%e; Retail Sales (unadj) Y/Y: 2.1% v 5.4%e.

- (TW) Taiwan Jun Export Orders Y/Y: 24.6% v 23.2%e.

- (BE) Belgium July Consumer Confidence: -4 v -4 prior.

Fixed income issuance

- (UK) DMO sold £1.7B in 1.125% Sept 2035 inflation-linked Gilts (UKTi); Real Yield: 1.588% v 1.386% prior; bid-to-cover: 3.35x v 3.02x prior.

- (AT) Austria Debt Agency (AFFA) sold total €1.61B vs. €2.0B indicated in 3-month and 6-month bills.

Looking ahead

- (NG) Nigeria Interest Rate Decision: Expected to leave Interest Rate unchanged at 27.50%.

- (MX) Mexico CitiBanamex Survey of Economists.

- 05:15 (UK) BOE Gov Bailey testifies Treasury Committee.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:15 (CH) Switzerland to sell 3-month Bills.

- 05:30 (DE) Germany to sell €1.5B in 2033 and 2035 Bunds.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (ZA) South Africa to sell combined ZAR3.75B in 2032, 2035 and 2053 bonds.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO) (prior €7.16B with 46 bids recd).

- 06:00 (IE) Ireland Jun PPI M/M: No est v 0.8% prior; Y/Y: No est v -1.8% prior.

- 07:30 (US) Fed's Bowman.

- 08:00 (PL) Poland Jun M3 Money Supply M/M: 0.4%e v 0.9% prior; Y/Y: 10.2%e v 10.3% prior.

- 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to leave Base Rate unchanged at 6.50%.

- 08:00 (MX) Mexico May Retail Sales M/M: +0.4%e v -1.0% prior; Y/Y: 1.4%e v -2.0% prior.

- 08:00 (MX) Mexico May IGAE Economic Activity Index (Monthly GDP) M/M: 0.2%e v 0.5% prior; Y/Y: +0.5%e v -1.6% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (RU) Russia announcement on upcoming OFZ bond issuance (held on Wed).

- 08:30 (US) July Philadelphia Fed Non-Manufacturing Activity: No est v -25.0 prior.

- 08:30 (US) Fed's Powell gives welcome Remarks at Regulatory Conference.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 10:00 (US) July Richmond Fed Manufacturing Index: -2e v -7 prior.
-11:30 Treasury to sell 6-Week Bills.

- 16:30 (US) Weekly API Crude Oil Inventories:

- 20:30 (AU) Australia Jun Westpac Leading Index M/M: No est v -0.1% prior.

- 21:30 (JP) BOJ Dep Gov Uchida in Kochi.

- 22:00 (SL) Sri Lanka Central Bank (CBSL) Interest Rate Decision: Expected to leave Overnight Policy Rate unchanged at 7.75%.

- 22:30 (HK) Hong Kong to sell combined HKD3.75B in 3-year and 10-year bonds.

- 22:30 (TH) Thailand to sell combined THB41B in 2030 and 2050 bonds.

- 23:35 (JP) Japan to sell 40-Year JGB Bonds.