They say a week is a long time in politics, but even a day can be a long time in the markets as we found out on Tuesday.

After last week’s lower-than-expected June US inflation print, traders loaded up on bets the Federal Reserve would start lowing interest rates to the point where a 25 basis point or 0.25% cut in September was fully priced-in by Friday’s close.

When, on Monday, Fed chair Jerome Powell said the recent economic data had bolstered the central bank’s confidence that inflation was heading towards its 2% target, paving the way for near-term easing, two cuts were being priced in by Christmas.

Except that on Tuesday, US core retail sales rose by more than expected, and because central banks are so ‘data-dependent’ even the slightest deviation from the script can cause the dollar and bonds to jump around and bets to be unwound.

As for the UK, the Labour party has inherited an economy which is far from rude health but has skirted a hard landing, and the IMF (International Monetary Fund) has just upgraded its forecast for growth this year from 0.5% to 0.7%.

In terms of rate bets, two-year gilt yields here have actually gone below 4% for the first time this year and grocery price inflation fell to 1.6%, its lowest level in three years, encouraging traders to price in two 0.25% rate cuts before the end of the year.

In Europe, the ECB (European Central Bank) is expected to leave rates on hold when it meets today so economists and analysts will look for clues in the commentary on when the next cut is likely.

Next week brings several keenly-watched industrial surveys, where the focus will be on services and service prices, which look to be the last obstacle to concerted rate cuts, as well as US second-quarter GDP (gross domestic product) which is expected to show a mild slowdown from the 1.4% expansion seen in the first quarter.

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