Strong whiff of stagflation' from US economic data

US economic data continues to give a strong whiff of stagflation, as the labour market slows down to a crawl (though without any sign of systematic layoffs), consumer demand grows sluggishly, but inflationary pressures remain elevated.

Last week’s ISM business sentiment numbers reflect this, with the July numbers showing slow growth in orders but a soaring prices paid subindex, likely due to tariff pass through.

The other big news of the week was that dove Christopher Waller is reportedly favourite to be named as the next Fed chair, a potentially bearish development for the greenback given his preference for lower US rates.

This week provides two critical checks for this narrative: inflation on Tuesday is expected to show stubborn upward pressure on the core subindex. Friday's July retail sales report will also give us a timely read on the state of the engine of the US economy: consumer demand.

All in all, the roughly two Federal Reserve cuts priced in for the rest of the year seems reasonable to us, but every inflation report takes on added importance given the large uncertainty over who will bear the cost of the tariffs: exporters, businesses or consumers.