The most recent economic data shows the continued widening trends of decoupling from robust global markets to uncertain markets in Europe and Asia. In contrast to the increases, Producer Price Index (PPI) in Germany decreased slightly and China kept its loan prime rates steady. At the same time, the UK inflation report surprised on the upside, rippling through currency and treasury markets.
Subsequently, Germany’s PPI dropped by 0.1% in July, continuing a pattern of deflationary pressures throughout the country. On a year-over-year basis, the PPI fell further into negative territory, coming in at -1.5%, down from -1.3% last month’s report. This unprecedented decline begs the question of what it means for the health of the German economy as a whole. Our manufacturing sector, in particular, depends on stable prices.
This week, China’s central bank announced its first-ever yuan financial-shock-with-sympathy policy. It has frozen the one-year loan prime rate at 3.0%. To accompany this, the five-year loan prime rate was held at 3.50%. This has prompted Chinese authorities to take a very cautious approach. Despite facing huge economic headwinds themselves, in the form of chronically weak domestic demand and external shocks.
Meanwhile in the US, inflationary pressures ticked upwards again, as the Consumer Price Index (CPI) increased by 0.1% in July. Year-over-year CPI rate rose to 3.8%, up from 3.6% in June, faster than anticipated. This increase in inflation should lead to serious conversations amongst policymakers about whether and when the Fed should start changing monetary policy.
The quiet markets pushed the yield on 10-year U.S. Treasury bonds down nearly a basis point, falling back under the 4.30% level. In Europe, benchmark 10-year yields were mixed but mostly down 1 to 2 bps on the day. The UK’s 10-year Gilt yield fell even further, down four bps.
Despite some fluctuations, the Dollar Index has remained relatively stable over the past five sessions, indicating a period of consolidation for the U.S. currency. NOTE: October West Texas Intermediate (WTI) crude oil futures are currently active. They have since been zig-zagging back and forth across Monday’s defined trading range of $61.45 to $63.00.
Of these factors, the Australian dollar proved most steadfast against the risk-off market mood seen last Thursday. So after such a remarkable outside down day, it did very little follow-through selling until yesterday. At the moment, it floats just above a major descending trendline connecting July highs, which is located around $1.1745.
Additionally, service inflation is up to 5.0% in the West, up from 4.7% last month. Yet this three-month high is a leading indicator that cost pressures are bottling up inside the once service-y sectors — those in the services economy — too.
Among these moves, the Swedish krona did remain the strongest G10 currency in this scenario through H1 2025. It soared by a stunning 17%! This very large jump is a sign of investor confidence in Sweden’s economic outlook and monetary policy stability.
In currency trading, Sterling has struggled recently, hitting a five-day low just below $1.3480 and extending losses further to approximately $1.3460 today. This drop could be representative of market fears about the UK’s inflation path and possible action from the Bank of England.