Muzinich Weekly Market Comment: Two sides to every story

July 7, 2025

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In our latest roundup of key developments in markets and economies, we look at the key takeaways from the ECB’s annual conference in Portugal and a busy week of dealmaking between the US and its trade partners.

Overall, last week saw a calm start to the month. Our preferred measure of volatility, the VIX, remains below 20, demonstrating limited change from the current positive sentiment.^[1] Equities continued to grind higher, with the S&P 500 reaching a new all-time high.^[2] The US dollar and commodities remained range bound; EM currencies slightly outperformed, led by Latin America, with the Brazilian real gaining 1.5% against the US dollar.

Meanwhile, precious metals outperformed industrial metals, especially platinum group metals, driven by a global shortage and strong demand. Platinum, approaching its highest level since 2014, is up over 50% year to date.^[3] In credit, high yield continued to grind tighter, while investment grade remains more volatile, buffeted by moves in government bond curves. Last week, government bonds were the exception to the broader calm in capital markets - intraday price action has been anything but quiet.

Central bankers head to Portugal

The European Central Bank’s (ECB) Annual Conference was held last week in Sintra, Portugal, a significant date in the calendar for central bankers. The takeaway from Bank of Japan (BoJ) Governor Ueda Kazuo was distinctly dovish. He emphasized that core inflation remains below target, using this to justify why the BoJ continues to keep policy rates below neutral levels. Ueda also cautioned against rushing to unwind the central bank’s balance sheet, stressing the risk of over-tightening too soon in the current environment.

Breaking down Japan’s inflation dynamics further, he acknowledged the presence of a positive wage-price cycle but highlighted supply shocks remain a key driver. Additionally, he pointed to uncertainty surrounding US tariffs as another reason to maintain a cautious stance.^[4]

Art of the deal

On trade developments and the looming tariff deadlines, headlines out of Japan were far from encouraging. President Trump threatened to impose 35% tariffs on Japanese imports as trade negotiations reached a stalemate, casting a shadow over the prospects for a deal.^[5]

Elsewhere in Asia, there were more encouraging signs. A deal was announced between Vietnam and Japan, under which Vietnamese goods exports to the US will face a 20% tariff, while US exports to Vietnam will face zero tariffs.^[6] Meanwhile, the US and Indonesia signed a Memorandum of Understanding covering trade and investment agreements worth US$34 billion,^[7] and India’s trade delegation has extended its stay in Washington, signalling both sides are working hard to finalize an agreement before the July 9 deadline.^[8]

As for China, the US-China relationship appears in a good place versus recent history. Last week, the US lifted export restrictions on Chinese chip design software firms and ethane producers. In return, Beijing has made concessions on rare earths, further signalling goodwill between the two sides.^[9] Adding to the positive momentum, China’s Caixin Manufacturing PMI,  the best gauge of the country’s private sector and export-oriented firms, rose back into expansionary territory, climbing to 50.4 in June.^[10] This significantly exceeded expectations of 49.3 and marked a strong rebound from May’s reading of 48.3, suggesting a recovery in Chinese export activity.

In Europe, headlines suggested that negotiations are progressing towards an easing of transatlantic trade tensions. The European Union has signalled its willingness to accept a trade arrangement with the US that includes a 10% universal tariff on a broad range of its exports. However, the EU wants concessions in return, specifically pushing for quotas and exemptions to effectively reduce the 25% US tariff on EU exports of automobiles and car parts, as well as the 50% tariff on steel and aluminium.^[11]

Back to the ECB conference in Sintra, where President Christine Lagarde gave the impression that she is relaxed about inflation and would not resist additional monetary easing. “I’m not saying mission accomplished but I say target reached,” she said.^[12] Bank of England (BoE) Governor Andrew Bailey struck a slightly more dovish tone, reiterating that further interest rate cuts are on the table, as he acknowledged further signs of a softening UK economy.^[13]

Mood darkens in UK

The UK government, for its part, would likely welcome policy easing during what was a tough week politically after a major U-turn on welfare spending cuts.^[14] This reversal raised fresh concerns about fiscal discipline, coming just weeks after a similar U-turn on winter fuel payments. Regardless of the political rationale, the perception in markets is that the government is struggling to implement even modest spending reductions, despite Labour’s commanding 174-seat majority.

UK Chancellor Rachel Reeves has been a vocal defender of strict fiscal rules, but pressure is building to ease those constraints and allow for more borrowing. This is fuelling concern in the UK government bond market that a shift in policy could spark a new wave of borrowing and put upward pressure on yields. The alternatives are limited. The government could raise taxes,  such as income tax or VAT,  but these options have already been ruled out and would be politically toxic. Seemingly, the only other path would be to somehow engineer a sharp acceleration in economic growth.

The overnight index swap (OIS) market is currently pricing in three 25-basis-point rate cuts, with the first expected in August, followed by additional easing on a quarterly basis.^[15] The government will hope monetary loosening arrives quickly and goes deeper to support growth. The alternatives, such as breaching fiscal rules or raising taxes, risk exacerbating political and market instability.

If the UK took a cue from the US administration, the advice would likely be to drop fiscal rules, spend and deregulate, and grow your way out of debt. Last week, US Congress passed the so-called "One Big Beautiful Bill Act", a sweeping US$3.4 trillion net fiscal stimulus package, by a narrow 218-214 vote.^[16]

The Senate approved the bill two days earlier, with Vice President JD Vance casting the tie-breaking vote in a 51-50 split. Notably, the bill includes a US$5 trillion increase to the debt ceiling, which likely takes the issue of hitting debt limits off the table for the next 2.5 years.

Just as the UK government is hoping for a quicker shift toward monetary easing, the Trump Administration is also putting pressure on its central bank to accelerate policy loosening. Last week, President Trump sent a handwritten letter to Federal Reserve Chair Jerome Powell, urging the Fed to lower interest rates “by a lot”.^[17]

However, in a measured speech delivered at the ECB’s Sintra forum, Powell signalled that the Fed is inclined to keep rates on hold through the summer. In a pointed, yet subtle, remark, he also acknowledged that the Fed might have already cut rates were it not for the inflationary impact of the Administration’s tariff initiatives.^[18] The market is pricing in a 72% chance that the next 25bps cut will come in September, with a total of 50bps expected in 2025.^[19]

Chart of the Week: A tale of central bank sentiment: BoE dovish, ECB less dovish, Fed Balanced

Source: Bloomberg, BENLPFed Index, BENLPBOE Index, BENLPECB Index. Indices measure sentiment towards policy moves among central banks, with 0 = neutral, less than 0 = dovish and greater than 0 = hawkish. As of July 4, 2025. For illustrative purposes only.

References

[1] CBOE, 'Chicago Board Options Exchange Volatility Index,' as of July 4, 2025
[2] S&P Global, S&P 500, as of July 4, 2025
[3] Kitko, Platinum price, as of July 4, 2025
[4] Bloomberg, ‘BOJ’s Ueda Still Needs More Information to Decide Next Rate Hike,’ July 2, 2025
[5] CNN, ‘Trump warns 'spoiled' Japan may not get a US trade deal,’ July 2, 2025
[6] Politico, ‘US and Vietnam reach initial tariff deal,’ July 2, 2025
[7] Bloomberg, ‘US, Indonesia to Sign $34 Billion Pact as Part of Tariff Talks,’ July 3, 2025
[8] Times of India, ‘As trade talks gather pace, Indian team extends stay in US,’ July 1, 2025
[9] Reuters, ‘China navigates delicate US truce while affirming trade consensus,’ July 4, 2025
[10] Caixin, PMI June 2025, July 4, 2025
[11] Bloomberg, ‘EU-US Trade Talks Focus on Tariff Offset for Automakers,’ July 4, 2025
[12] The Wall Street Journal, ‘Eurozone Inflation Hits 2% Target, Raising Chance of ECB Rate Hold,’ July 1, 2025
[13] Reuters, ‘BoE's Bailey stresses weakening labour market, hit to economy from uncertainty,’ July 2, 2025
[14] Department for Work and Pensions, ‘Further details on welfare reforms published ahead of Second Reading,’ June 30, 2025
[15] Bloomberg, World Interest Rate Probabilities,’ as of July 4, 2025
[16] US Congress, ‘One Big Beautiful Bill Act,’ July 3, 2025
[17] CNN, ‘Trump sends handwritten letter to Powell demanding ultra-low interest rates,’ June 30, 2025
[18] CNBC, ‘Powell confirms that the Fed would have cut by now were it not for tariffs,’ July 1, 2025
[19] Bloomberg, World Interest Rate Probabilities,’ as of July 4, 2025

 

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