Make no mistake—this week is extraordinarily important for the global economy. UK and Japanese major financial houses hold such uncertainties close to record heights while trade tensions continue to increase. With the U.S. economy still proving remarkably resilient — at least for now — inflation still matters the most to the Federal Reserve. Countries are having to contend with unprecedented economic circumstances that are constantly changing. This compromise has large implications for U.S. foreign diplomacy as well as international and domestic policy.
Meanwhile, the United States has shown surprising economic resilience, emerging largely unscathed from its almost yearlong trade war. Even with a 35% tariff on everything else not included in the United States-Mexico-Canada Agreement (USMCA), look at how well the economy is doing. It’s doing it uniformly well, all statewide. Yet it is these tariffs that have sparked tit-for-tat fires in the negotiations. Canada is now staring down the barrel of massive duties largely because an extension on existing agreements was not granted.
The United Kingdom is on the brink of a serious bout of stagflation. This toxic mix of no economic growth and high inflation is a dangerous combination. The Bank of England’s upcoming decision looms large, especially following Chancellor Rachel Reeves’ Autumn budget, which has raised concerns about the UK’s economic outlook. By June, the country’s headline Consumer Price Index (CPI) had shot up to 3.6% YOY. Policymakers are under incredible and growing pressure to address these issues sooner than later.
The U.S. Economic Landscape
Over the past few months, the U.S. economy has continued to show surprising resiliency—carrying on in the face of inflationary headwinds. As the Federal Reserve battles historic inflation, it now faces a daunting economic task. Recently, Bank of Canada Governor Tiff Macklem went public with his fears about inflation, saying,
“There are reasons to think that the recent increase in underlying inflation will gradually unwind.” – Governor Tiff Macklem
This sentence captures the tightrope the Fed will need to walk as it contemplates these possible policy changes.
Over the past two decades, the U.S. has failed to seriously negotiate many of these key trade deals. Those partners are primarily the UK, EU, Japan and South Korea. These agreements are considered essential to reinforcing trade ties at a time when relations are still strained from the fallout of Trade War II. Negotiating has continued to be difficult, particularly with Canada. The country—and their communities—now face a crushing 35% tariff on their products due to the unpredictable nature of ongoing trade wars.
Though overall economic indicators in the U.S. seem as strong as ever, worries remain about whether inflation is here to stay. The Federal Reserve comes to a crucial juncture in its decision-making. It needs to be thoughtful about what it does as inflation slows and the international trade landscape significantly changes.
The UK’s Stagflation Concerns
On the other side of the Atlantic though, the Bank of England’s September decision is being widely viewed as the most important market event this week. Governor Andrew Bailey has pivoted to a much more dovish tone of late, in light of the worsening economic picture for the UK. As inflation soars and growth stalls, policymakers should proceed with extreme caution as they consider demands for interest rate hikes.
Chancellor Rachel Reeves’ budget announcement has drawn scrutiny and concern regarding its potential impact on the UK’s economy. Many analysts fear that without decisive action, the country may slip further into a stagflationary environment, characterized by both high inflation and stagnant growth.
Investors and economists will be watching the Bank of England’s first assessment closely. Its decisions may have a significant bearing on the UK’s course of economic prosperity and set the direction for global capital markets.
Japan’s Economic Challenges
Meanwhile, Japan faces its own set of economic challenges as the Bank of Japan (BoJ) navigates monetary policy amid persistent uncertainties. Yet at the BoJ’s meeting in July, it failed to signal a clear direction of intent towards more aggressive further tightening of its monetary policy. Currently, a year-end rate hike is only approximately 70% priced in for the BoJ, raising questions about its future direction.
In the last six months, the Japanese yen has precipitously devalued against the U.S. dollar. This decline is driven by investor confusion over the efficacy of the recently negotiated U.S.-Japan bilateral trade agreement. Japan’s economy faces headwinds from its lackluster recovery and continued impacts from trade disruptions. Market participants have been watching intently for indications of any policy reversal that might strengthen the currency or lead to deeper currency weakness.