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Daily Economic Update
29.07.2025Europe: European stocks reversed intraday gains as US trade deal optimism fades, with members divided on the tariff level. After the EU reached a trade deal with the US on Sunday that would impose 15% tariffs on most EU goods, along with investments in the US worth $600bn and the purchase of $750bn of US energy goods, the initial optimism surrounding the agreement seems to have given way. The head of European Commission von der Leyen defended the deal, saying “we should not forget where we came from” and it “delivers stability and predictability, for citizens and businesses.” However, many EU members were disappointed with the 15% tariff level and overall concessions, with German Chancellor Merz saying that “the German economy will suffer significant damage from these tariffs” and French PM Bayrou calling it a “a dark day.” Doubts also grew about the EU’s offer to buy $750bn US energy goods by 2028, i.e., $250bn per year, given US’s total energy exports in 2024 stood at around $300-350bn, with the EU’s share being some $80bn, implying tripling the amount of annual imports as per the agreement. This could be especially unrealistic considering an increasing appetite among other nations to buy US energy in order to extract favorable terms from Trump in their own trade discussions. Though details of the deal are still being finalized, there are renewed concerns in the market that uncertainties will persist over the coming period and that the deal could hurt European exporters. Amid these worries, the Euro Stoxx 50 initially rose by over 1% intraday yesterday, then gave back all the gains and closed 0.3% d/d lower. Germany’s Dax, one of the best performers amongst major equity markets this year (ytd: +20%), led the decline by falling 1% yesterday. The euro also reversed its bullish move seen yesterday morning and dropped by over 1% against USD from its intraday peak, though it is still up 11% ytd.
Japan: BoJ is mulling another rate hike this year-end after the US trade deal. The Bank of Japan (BoJ) is widely expected to maintain its short-term interest rate at 0.5% at its policy meeting next Thursday, while updating its economic projections. The decision follows a series of significant developments, including the recent trade agreement with the US, the outcome of the upper house elections, and a noticeable easing of inflationary pressures over the past two months. The trade deal, which sets most tariffs at 15%, has reduced a key source of economic uncertainty, enabling the BoJ to refocus on the trajectory of inflation and business sentiment. Meanwhile, five opposition parties have pledged to introduce legislation to eliminate the provisional gasoline tax and advocate for broader tax cuts and higher public spending—proposals that have raised concerns among financial markets and international institutions. The International Monetary Fund and credit rating agencies have issued warnings, citing Japan’s debt-to-GDP ratio exceeding 250% and the risk of a sovereign downgrade if fiscal discipline weakens. Meanwhile, consumer price inflation moderated to 3.3% y/y in June from January’s 4.0% on the renewal of energy subsidies, waiving of water utility fees in Tokyo, and a sharp decline in import prices. These factors have prompted a reassessment of the BoJ’s rate hike trajectory, with markets and investors now seeing an increase by year-end as more likely. Markets are now focusing on July’s BoJ quarterly outlook report and any comments by Governor Kazuo Ueda on the timing of the next rate hike.
Bahrain: Prices fell at slower pace in June. Consumer prices fell by 0.4% y/y in June, marking the third consecutive month of deflation, though slowing from a 1% y/y decline in May. The decline in food and beverage prices continued to weigh down on the overall CPI index as prices fell for the eleventh consecutive month, albeit easing to -3.6% y/y in June from a steeper -9% in May. Softer deflation was also recorded in items including clothing and footwear (-1.7% from -3.1%), furnishing and household equipment (-0.1% from -1.5%) and recreation and culture (-2.3% from -6.8%). Meanwhile, lower inflation was recorded in several other items, most notably in transport (1% from 3%), restaurants and hotels (1.7% from 3.9%), and miscellaneous goods and services (1.6% from 2.8%). On a monthly basis, prices rose by 0.9%. Looking back at H1 2025, inflation averaged -0.3% y/y and could drift slightly upwards in the second half on reduced negative base effects in some items (food, clothing, furnishing, recreation), but will likely be capped by limited inflationary pressure overall. Bahrain is the only country in the GCC currently recording deflation, although others (Qatar +0.1% y/y, Oman +0.8%) are close and in the UAE, Abu Dhabi is also registering price declines (-0.6%).