US inflation and bank banks ahead

• Auto stocks drive European strength.
• Chinese data highlights relatively stable economy.
• US inflation and bank banks ahead.

European markets are taking a largely positive stance in early trade today, casting aside the tariff fears that had dominated the newswires over the weekend. Instead, today sees markets looking ahead to a day which will be dominated by both earnings and economic data, with US CPI and a raft of big bank figures due later in the day. Overnight data out of China continued to tell a story of relative health, with GDP (5.2%) and industrial production (6.8%) coming in better than expected. There will be some concern over the drop in retail sales (4.8%), but for now we are seeing a Chinese economy that remains relatively stable despite the challenges facing it.

For US inflation, the relative calm seen over recent months has provided Trump with a stick to beat Powell with, repeatedly claiming that the data now proves that tariffs are non-inflationary. However, the federal reserve remain cautious for good reason with the risk of a sharp rise in the tariff rate on 1 August providing grounds for a more patient approach. Arguably the relatively strong economic data out of the US highlights little need for dramatic monetary easing, with the need to drive down rates instead increasingly linked with reducing borrowing costs for the government rather than the US consumer.

Notably, the DAX strength has been propped up by the automotive sector, with BMW, Porsche, Mercedes-Benz, and Volkswagen on the rise after the EU outlined retaliatory measures that targeted a number of sectors including US cars. There is a hope that an eventual deal with the US could include some reduction in the current 25% tariff on vehicles and parts implemented in April, which would at least provide European exporters with a competitive advantage against their Chinese counterparts.

Today sees second quarter earnings from a raft of big banks, with likes of JP Morgan, Wells Fargo, Blackrock, Citigroup, BoNY, and State Street all reporting before the US open. There is a hope that this will provide a welcome positive introduction to earnings season, with the environment of higher equity prices, a relatively healthy US economy, and elevated interest rates meaning that trading activity and bank margins are in a good place. Trump’s “big, beautiful bill” should help future profitability, extending tax cuts that have boosted the coffers of the big banks, leading to increased buy-backs, and dividends since Trump’s first term.