News of the week summary - 07/09/2025

Eurozone inflation climbs above ECB target

Inflation in the eurozone ticked up to 2.1% in August, the first time since April it has breached the European Central Bank’s 2% target. While the increase was modest, it has tempered expectations that the ECB might cut interest rates later this year.

The ECB has been on a long journey of easing, halving borrowing costs in several steps since mid-2024. Many investors had hoped that slowing inflation would give policymakers room to cut rates further to support growth. But the latest reading suggests that inflationary pressures, though mild, remain. Higher food, alcohol, and tobacco prices (up 3.2% compared to a year earlier) were the main drivers. By contrast, services inflation, often seen as a more persistent source of price growth, eased to 3.1%, its lowest level since early 2022. Core inflation, which strips out volatile items like food and energy, remained steady at 2.3%.

Reactions in markets were muted. The euro dipped slightly against the dollar, and traders in interest rate derivatives continued to see only about a 50-50 chance of a cut by March 2025. The ECB’s September meeting is widely expected to leave rates unchanged at 2%.

What’s at stake is the balance of risks. Some policymakers, such as Finland’s Olli Rehn, argue that cheaper energy, a stronger euro, and subdued services inflation could push prices down. Others, including Isabel Schnabel, warn that global trade tariffs and rising food costs amplified by extreme weather, could instead fuel further inflation.

For households, the persistence of high food prices is particularly important, since grocery bills heavily influence how people perceive inflation. Even small increases in this category can weigh on consumer confidence.

Overall, while the August data is unlikely to trigger alarm, it reduces the odds of imminent rate cuts. The ECB appears set to remain in “wait-and-see” mode, watching whether inflation trends soften enough in the coming months to justify loosening policy further.

Russia and China advance pipeline deal

Russia and China have signed a long-discussed agreement to move forward with the “Power of Siberia 2” pipeline, a massive project that could redirect Russian gas flows from Europe to Asia and deepen Beijing’s energy security ties with Moscow. The deal, announced during President Vladimir Putin’s visit to Beijing, comes in the form of a legally binding memorandum of construction between Gazprom and Chinese counterparts. However, key details, particularly the pricing of the gas, remain unresolved.

The planned pipeline would transport about 50 billion cubic meters of gas annually by the early 2030s, roughly the same volume Russia once supplied to Germany before the collapse of its energy trade with Europe. This would give China an alternative to liquefied natural gas (LNG) shipped from the US, Qatar, and Australia, reducing its reliance on seaborne imports and expanding its overland energy supply. The project will pass through Mongolia, whose president also joined the talks.

Alongside this future pipeline, Moscow and Beijing agreed to expand existing supply routes by an additional 8 billion cubic meters, with the goal of raising flows to 56 bcm before Power of Siberia 2 is complete. Still, Chinese state media downplayed the gas deals, framing them as part of broader cooperation agreements, while analysts cautioned that the announcement may be more symbolic than concrete. Without clarity on price, financing, or a construction timeline, the memorandum remains a political gesture rather than a binding commercial contract.

If completed, the pipeline would leave China sourcing about one-fifth of its gas from Russia, a significant but not dominant share given its expected demand of 600 bcm by the 2030s. For Russia, however, the project represents a major strategic pivot: with European markets closed, redirecting its energy exports eastward is central to sustaining its gas industry. For China, the arrangement enhances supply diversity but also risks deepening reliance on a single partner at a time of shifting geopolitical alignments.

Opec+ raises output again

Opec+, the alliance of major oil exporters led by Saudi Arabia, has decided to raise production in October, marking the latest step in its effort to reclaim market share after years of output cuts. Eight members, including Saudi Arabia, Iraq, and the UAE, pledged to lift production by 137,000 barrels per day. In practice, however, only Saudi Arabia and the UAE are expected to meaningfully boost output, as most other members are already producing near capacity.

The decision continues a reversal that began in April, when the group started unwinding cuts that had been in place since 2023. Altogether, Opec+ members have restored about 2.5 million barrels a day this year, and are now moving to roll back an additional 1.65 million barrels in cuts. A separate set of deeper cuts, 2 million barrels per day shared across all members, is scheduled to stay in effect until 2026.

The strategy reflects a fundamental change in Saudi Arabia’s priorities. For years, Riyadh had tried to prop up prices by keeping supply tight, but this meant carrying the heaviest burden of production cuts while losing market share to rivals. With Brent crude trading at around $65 a barrel, well below the $101 average in 2022, the kingdom is now prioritizing revenue growth through higher volumes rather than higher prices. Restoring output also allows Saudi Arabia to test the true production capacity of its partners, setting the stage for possible quota renegotiations in the future.

So far, the supply increases have not triggered a steep collapse in prices, thanks to sanctions on Russia and Iran and seasonal demand during the northern hemisphere’s summer. But analysts warn that as Opec+ keeps adding barrels, the market surplus expected later this year will widen, putting downward pressure on prices.

Renminbi reaches highest level against the Dollar since November

China’s renminbi has climbed to its strongest level against the US dollar since Donald Trump’s 2024 election victory, trading at 7.14 per dollar after appreciating 2.3% this year. The move reflects Beijing’s willingness to allow gradual strengthening of its currency, in part as a diplomatic signal during ongoing trade negotiations with Washington.

The Trump administration has a history of accusing China of being a “currency manipulator,” suggesting that Beijing deliberately weakened its currency to make exports cheaper. By letting the renminbi rise, Chinese policymakers appear eager to counter such claims and demonstrate that they are not pursuing devaluation as a tool of trade policy.

Despite its gains, the renminbi has lagged other major currencies such as the euro and yen, which have risen more sharply against a weakening dollar this year. This relative underperformance means that on a “trade-weighted basis” (a measure that looks at the currency’s value against all trading partners, not just the US) the renminbi has actually weakened. That gives Chinese exporters a competitive edge while leaving manufacturers in other countries under more pressure.

China’s record trade surplus adds further support for the renminbi. In 2024, the surplus was just under $1 trillion, and in the first seven months of this year alone it already reached $685 billion. Normally, such surpluses push a currency higher over time, since foreign buyers need renminbi to pay for Chinese goods. Yet many analysts still view the renminbi as undervalued by traditional measures.

Beijing also has strategic goals for its currency. A more stable and gradually strengthening renminbi can boost investor confidence and encourage central banks and sovereign funds to use it as an alternative to the dollar. This ambition to internationalize the renminbi aligns with China’s broader push for financial influence.

Finally, a rally in Chinese equities has supported the currency, and global investors increasing their allocations to Chinese assets could provide the momentum needed to strengthen it further, possibly below the symbolic Rmb7 per dollar level.

US job growth stalls

The US labor market slowed sharply in August, with only 22,000 jobs created compared to 79,000 in July. The unemployment rate edged up to 4.3%, signaling a cooling job market and increasing pressure on the Federal Reserve to cut interest rates at its September meeting. Economists had expected a much stronger reading of 75,000 jobs.

The slowdown comes amid two policy headwinds: higher tariffs introduced by President Trump and tighter immigration rules. Tariffs have pushed the average US duty rate to its highest since the 1930s, raising costs for businesses and adding uncertainty to hiring decisions. Meanwhile, fewer immigrants mean a smaller labor pool, reducing the supply of workers in key sectors. Together, these factors have weakened the pace of job creation.

For households, the weak report means fewer opportunities and potentially slower wage growth. For policymakers, it tilts the balance toward easing monetary policy. Fed Chair Jerome Powell has already hinted that a rate cut is possible this month, acknowledging labor market risks even as inflation remains a concern. With rates currently at 4.25–4.50%, the Fed faces a delicate trade-off: cut too soon and risk reigniting inflation, wait too long and risk a deeper slowdown in hiring.

The broader picture is one of a labor market losing momentum. Job growth is no longer fueled by robust hiring and firing, which signals dynamism, but instead depends on the net effect of new businesses forming. With economic uncertainty weighing on that process, the path ahead looks increasingly fragile.