com EU Mid-Market Update: Soft UK growth, hawkish ECB & an incoming UK Defence Plan that is expected to be short of funding; Focus on USD/JPY move

**Notes/Observations** - Month-end data flow was broadly constructive for the eurozone but added to the ECB's policy dilemma.

French preliminary June CPI surprised to the downside at 1.8% y/y (vs 2.0%e), bringing headline inflation back to target for the first time in three months, while French consumer spending (+0.5% m/m) beat.

German May retail sales jumped 1.1% m/m (vs flat expected), unemployment unexpectedly fell (-1.0k vs +5.0k expected), and the early North Rhine-Westphalia CPI print eased to 2.1% y/y ahead of the national figure.

The main inflation watch-out came from German import prices, up 6.8% y/y - the strongest annual rise since December 2022.

Elsewhere, Italian PPI cooled sharply, Swiss KOF beat (101.2 vs 99.0e), and Finland's GDP indicator firmed - On the ECB itself, the messaging skewed hawkish.

Lagarde opened the Sintra forum arguing Europe is now more resilient to shocks, characterizing June's quarter-point move as a deliberate, unanimous decision rather than an "insurance hike." Chief Economist Lane reinforced this, calling it a "robust decision" and flagging that oil prices may stay above pre-war levels for a couple of years, keeping a cost-push impulse in the system.

Nagel said it was too early to commit on further hikes but stressed vigilance and warned inflation could stay well above target; Wunsch went further, saying another hike may be needed and he'd rather move quickly.

With energy prices having retreated rapidly, press sources suggest the upcoming eurozone inflation print (tomorrow) could put a July hike back on the table.

Separately on trade, Sefcovic and China's Wang held "constructive" talks, and the EU and China set an October deadline to reset trade ties via a joint statement on new consultations. - UK macro was softer.

Final Q1 GDP held at 0.6% q/q but the annual rate was revised down to 0.9% (from 1.1%), nudging gilt yields lower and reinforcing expectations that BoE rate-hike odds are fading as growth slows.

The current account deficit came in slightly wider at -£22.1B, BRC shop price inflation held at 1.2%, business confidence dropped, and Zoopla flagged a 7% fall in sales agreed.

Sainsbury's Q1 update was modestly ahead with guidance affirmed. - Headline UK event is the Defence Investment Plan (DIP), to be published today and framed as one of Starmer's final acts before he stands down.

The expected funding settlement of roughly £14.5B falls well short of the ~£28B officials say is needed.

Key pre-briefed elements: a £5B push into drones and autonomy (pitched as the UK's largest-ever such investment, drawing on Ukraine and Iran lessons); naval shipbuilding via a new "common combat vessel" and amphibious ships, reviving the Anglo-Dutch Project Catherina to replace the retired Albion class (work spread across Babcock Rosyth, BAE Barrow/Govan and others); 12 nuclear-capable F-35A jets plus continuation of the Global Combat Air Programme with Italy and Japan; and new Commando Force capabilities aimed at a combined fleet with the Netherlands.

The plan is overshadowed by a funding row.

Defense Secretary John Healey resigned after the Treasury declined his requested resources (he'd secured £13.5B), and Armed Forces Minister Al Carns followed, calling it not "transformative enough." Successor Dan Jarvis pushed the settlement to ~£14.5B.

Political reception is hostile across the board: the Conservatives called it "too little, too late" (only ~2.69% of GDP by 2030, barely above the level Healey resigned over), the Lib Dems called it "late and underfunded," and there are doubts it meets NATO's 3.5%-by-2035 target - a relevant point with the NATO summit in July.

Notably, with Starmer treated as outgoing, his likely successor Andy Burnham has left the door open to revisiting the plan, so its durability is openly questioned even on publication day. - A few cross-asset threads matter for European desks.

The yen is the standout move: USD/JPY broke above 162 to a fresh 40-year low (weakest since 1986), with markets now eyeing 163-165 and intervention risk rising; Japanese officials repeated that "bold actions" remain an option but have so far only verbal-intervened.

The yen's slide dragged gold and silver lower.

On China, June official PMIs improved (manufacturing 50.3, composite 50.6) but analysts still see Q2 growth slowing toward ~4.6%, and trade frictions are widening (fresh anti-dumping deposits of up to 73.5% on Canadian pea starch; export curbs that drew a Japanese protest).

On the US/Fed, the Supreme Court blocked Trump's attempt to remove Governor Cook on due-process grounds - a modest positive for Fed independence - though it simultaneously broadened presidential power to fire other agency officials; markets are now pricing roughly 33bp of Fed hikes in H2, a hawkish global backdrop.

Finally, oil has fallen back to pre-war levels as the US-Iran ceasefire broadly holds (further Doha talks today), though the Strait of Hormuz demining standoff between France/Oman and Iran is a lingering risk, and AI/hyperscaler capex discipline plus telecom weakness on SpaceX competition fears were the main equity-level stories. - New 35-billion-parameter Chinese model called Agents-A1, developed by the InternScience team at Shanghai Artificial Intelligence Laboratory, is proving that scaling the agent horizon through sophisticated process supervision and distillation can deliver frontier-level long-horizon performance—such as SEAL-0 at 56.4 and IFBench at 80.6 —while rivaling much larger systems.

In an era dominated by HBM shortages and export controls, where global supply is sold out through 2026, this approach yields more intelligence per available memory die, complementing leaders like GLM-5.2 by prioritising practical, memory-efficient autonomy over raw scale.

This reflects a broader, maturing Chinese open-source strategy: turning hardware constraints into a distinctive advantage through knowledge-action graphs, domain teachers, and multi-teacher distillation, potentiall