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Daily Economic Update
27.07.2025US: Better than expected economic prints and markets’ overall optimism drive US equity markets to new record high despite persisting uncertainties. Business activity improved strongly in July, with the flash composite PMI rising to a seven-month high of 54.6 from June’s 52.9, according to an S&P Global survey. While services activity increased more than forecast to its highest this year to 55.2 from 52.9, manufacturing unexpectedly flipped back into contraction (49.5 from June’s 52.9) for the first time in 2025. The survey noted continuing overall employment growth for the fifth straight month, but manufacturing payrolls fell. On a concerning note, inflationary pressures intensified with the output price measure rising to its second highest since September 2022 as businesses increasingly passed through the impact of higher tariffs along with rising wages to their customers. Our takeaway is that headline optimism overshadowed weakening confidence and building price pressures – in other words, masking volatile conditions underneath. Meanwhile, initially weekly jobless claims also surprisingly declined to 217K (w/e Jul 19) from 221K the previous week, but continuing claims remained elevated at 1.96mn (w/e Jul 12) versus 1.95mn the week before, underlining a still robust though gradually loosening job market. Trump, meanwhile, mentioned that there was a 50-50 chance for striking a trade deal with the EU ahead of the Aug 1 deadline as he is scheduled to meet European Commission head Ursula von der Leyen in Scotland later today. He also showed his frustration about the lack of progress in trade discussions with Canada. In another development, despite engaging in some public sparring with Fed Chair Powell about the cost of ongoing renovation of Fed buildings, Trump reemphasized that he did not intend to fire Powell. Amid favorable headline economic data and markets’ optimism about more trade deals despite ongoing uncertainty along with some better-than-expected corporate earnings, the US equity markets hit a fresh record high, with S&P 500 closing +0.4% d/d on Friday, extending its winning streak to a seventh session out of the past eight.
Eurozone: ECB keeps policy rates unchanged and guides for a cautious approach ahead. The ECB, as widely expected, kept the deposit facility rate steady at 2% after cutting it by 200 bps since June 2024. The committee’s statement noted easing domestic price pressures along with slowing wage growth and a resilient economy despite the challenging global environment. ECB President Lagarde characterized economic growth as in line with or a little better than expected, while acknowledging that risks remain tilted to the downside given an uncertain tariff environment. She emphasized that the bank was “in a good place now to hold” and remained in a “wait-and-see” mode. A few other ECB members also struck a similar tone, with Martins Kazaks saying “a steady-hand policy is appropriate,” and Isabel Schnabel previously seeing the bar for further easing “very high.” We note that the latest economic activity data has been relatively robust with the HCOB Flash Eurozone composite PMI in July rising to an 11-month high of 51 from June’s 50.6 led by the improvement in services activity and the slower contraction in the manufacturing sector. However, lingering uncertainties about US tariffs could dampen the nascent optimism and create renewed disinflationary tailwinds. Nonetheless, following cautious ECB comments, markets pared bets for an anticipated final rate cut for this year.
UK: Growth in business activity unexpectedly eases. The S&P Global Flash composite PMI fell to 51 from June’s 52 as growth in services activity lost momentum, dropping to 51.2 from its 10-month high of 52.8 in June. Manufacturing, though, continued to improve to 48.2, a six-month high, still in contraction. New orders deteriorated as respondents cited a weaker domestic environment, geopolitical uncertainty, and delayed spending decisions due to US tariffs. Amid increased staff costs following hikes in national insurance contributions and minimum wages, firms continued to shed employment for the 10th straight month. The gauge of input prices, meanwhile, accelerated for the first time in three months on higher payroll costs, with the pace of output price rises also quickening somewhat. However, business confidence ticked up from June despite remaining soft overall as firms expect a tentative increase in consumer and business spending amid lower interest costs and a pickup in domestic demand. The latest PMI surveys point to a subdued outlook for the UK economy given that the government may renew fiscal tightening and the private sector employment scene has been deteriorating. Furthermore, June’s retail sales also disappointed, rebounding by a less-than-forecast 0.9% m/m (1.7% y/y) from an outsized drop of 2.8% (-1.1% y/y) in May.
Japan: Tokyo’s inflation slows for the second straight month in July. Consumer price inflation softened for the second consecutive month in July, coming at 2.9% y/y from June’s 3.1%. Similarly core inflation (excl. fresh food) eased to 2.9% during the same month while the “core-core” measure, which excludes fresh food & energy, was stable at 3.1%. Inflation peaked in May (3.4%) but has moderated for the past two months largely thanks to government subsidies and Tokyo government’s water charge waiver for the summer. The surge in rice prices also moderated to 82% y/y from 91% in June as the government released public stockpiles. Inflation is expected to continue slowing over the coming months, benefitting from the base effect of last year's rise in fuel costs and the slowdown in staple rice prices. At its policy meeting on July 30-31, the Bank of Japan is expected to hold interest rates at 0.5% while reviewing this year's inflation and growth forecasts in its quarterly review. These revisions will take into account the easing inflationary pressures and the recent trade deal with the US, which has somewhat diminished uncertainty over the country's economic outlook while, at the same time, complicated decisions around the timing of the next interest rate hike due to the impact of higher tariffs on growth and prices.
Saudi Arabia: Trade surplus steady at five-year low in May. The merchandise trade surplus stood at SR 9.5 billion (-68% y/y) in May, unchanged from the downwardly revised surplus of the previous month which was the lowest recorded since June 2020. The trade balance was weighed down by the steepest decline (-22% y/y) in oil exports in eight months, outweighing a 6% increase in non-oil exports (including re-exports) and pushing total exports down by 14% y/y. Meanwhile, imports grew by 8% y/y in the 18th month of uninterrupted year-on-year growth led by imports of machinery and mechanical appliances (23%) and mineral products (21%), which more than offset a notable drop in arms and munitions and vehicles/transport equipment imports. The trade surplus is likely to widen over the coming months as oil output and exports gradually recover thanks to the scheduled unwinding of previous voluntary production cuts.