BoE expected to cut rates to 4.00%

In focus today

Today we get Swedish flash estimates for inflation in July, where we expect that CPIF will rise to 3.17% (RB 2.50%) and that CPIFxE will decline to 3.06% (RB 2.84%).  A 'low' core number would support expectations of an H2 rate cut given that real activity data continues to underdeliver. A 'high core number' would fortify the Riksbank's stagflation dilemma, and while it could send rates and the SEK higher it would probably not fully erase expectations of later cuts. Our base case is that the policy rate will not go below 2.0%, although we have argued that the risk is clearly skewed to the downside.

The Bank of England is expected to lower the Bank Rate by 25bp to 4.00%, aligning with market and consensus expectations. Recent data has been a mixed, with labour market showing more pronounced signs of cooling, weaker than expected growth but inflation surprising to the topside. For more on our take see Bank of England Preview - On track with easing, 4 August.

Economic and market news

What happened overnight

In China, July trade data outperformed forecasts, with exports rising 7.2% y/y, surpassing expectations of a 5.4% increase. Imports also surprised, growing 4.1% y/y against expectations of a 1.0% decline. This led to a narrower trade surplus of USD 98bn, down from USD 115bn in June. The export surge was driven by a rush to ship goods ahead of the 12 August US tariff deadline, while stronger imports suggest tentative improvements in domestic demand.

What happened yesterday

In the euro area, retail sales rose by 3.1% y/y in June, surpassing the expected 2.6% y/y, driven by a continued rebound in domestic consumption. Monthly retail trade volume increased by 0.3% m/m, slightly below the expected 0.4%, though this follows upward revisions to previous months' weak figures. The annual growth was primarily supported by a 4.3% rise in non-food product sales and a 4.0% increase in car fuel sales, reflecting the bloc's resilience to trade uncertainty.

Trump announced an additional 25% tariff on Indian imports, raising the total tariff rate to 50%. The announcement followed a meeting between Putin and US's Witkoff, which Russian official described as productive. This move underscores Trump's ongoing efforts to target countries engaged in direct or indirect imports of Russian oil, where he has accused India of financing Russia's war in Ukraine via its oil imports. The additional tariffs are scheduled to take effect on 27 August.

Equities: Equity markets rallied yesterday in a session light on macro headlines but rich on micro developments, including another Trump-related twist that is becoming a near-daily fixture for market participants.

Equities advanced across the board, but what stood out was the relative performance within sectors. Healthcare notably lagged, despite (or rather, because of) the noise surrounding it.

While Novo Nordisk reported results, the broader driver was renewed unease about sector-specific tariffs - particularly given lingering uncertainty around pharma trade between the US and EU, despite the recent broader trade agreement. The moves were not just Europe-specific or earnings-driven. In the US, healthcare was the worst-performing sector on the day. The divergence was particularly striking when comparing healthcare with consumer staples both typically considered defensive. Yesterday alone, healthcare underperformed staples by nearly 3%, a rare daily spread of that magnitude within defensives. Asian markets are trading higher this morning, and the tone remains positive in US and European equity futures.

FI and FX: Yesterday, the US yield curve steepened from the long end as 30Y yield rose some 4bp, while 2Y yields declined 2-3bp. This was driven by a weak 10Y US Treasury auction and that the US will sell USD 25bn in the 30Y segment today.