Markets
Oil captured most of the market attention in the run-up to the US June CPI and Fed chair Warsh’s semiannual testimony before Congress. The NACHO trade pushed Brent towards an intraday high of $87.55, the most since mid-June. At a current price of +/- $86, one barrel is trading at an important technical and symbolical level, ie. the April-low that followed after US president Trump backtracked from Iran’s total obliteration to announce the first ceasefire. With the most recent one bombed to smithereens and the US blockade reimposed, oil prices can be expected to gravitate back to levels between $90 and $110. If Trump is serious about collecting a 20% security-servicing fee on cargo that passes through the Hormuz Strait, prices may in theory be even higher. Other energy commodities rally in lockstep with gas prices testing the highest levels since early April (Dutch TTF) and European gasoline and diesel (affected additionally by the Ukraine-stricken Russian refineries) prices adding multiple percentage points as well. US bonds took a hit already yesterday and are licking their wounds today with yields more or less steadying going into the CPI release. German and UK bonds immediately gapped lower at the open with the latter underperforming. Germany’s 2-yr yield fell just short of June’s two-year high and traded 6.5 bps higher on the day. Longer maturities added between 1 and 2.5 bps. It’s a relative outperformance of the long end though since those yields are already trading close to 15-year highs. UK rates added 3-4.5 bps across the curve. The US dollar failed to capitalize on the risk averse market environment. It is losing out modestly against all G10 peers.
US CPI missed the bar with headline inflation dropping by 0.4% m/m to 3.5% y/y (from 4.2%). A key reason, though, may soon prove temporary: energy prices slumped 5.7% m/m, led by the likes of gasoline (-9.7% m/m). That said, core inflation also printed lower than expected, with prices stagnating on a monthly basis and 2.6% higher y/y (from 2.9%). Both headline and core services inflation was flat while the likes of shelter (0.1% m/m), used cars (-0.2%), medical care (-0.1%) and apparel (-0.6%, a tariff gauge) amongst others weighed on the index too. The underlying gauge gained in importance after Fed Waller’s earlier comments. Printing higher than 0.2% m/m would have created a significant risk for near-term (ie. July) tightening. Markets are now paring the odds from +/- 40% to just 14% currently while still assuming at least one move at a later meeting this year. US rates yanked up to 10 bps lower at the front end while dropping 2-5.5 bps in the 10-30 yr bucket. That capped some of the yield increases on other core bonds too. Stocks bounced and the dollar extended losses. EUR/USD rises towards 1.145 and DXY falls towards 100.7. Moves remain technically insignificant. The US CPI is a gift for Warsh. A hot print would have increased the heat at today’s grilling before Congress with questions that press him into a timing for a rate hike. Now, he can be more close-mouthed and strike the same hawkish but little-telling chord he had done so far. His prepared remarks reveal nothing about his preference on rates either. Warsh doubled down on his earlier message to restore price stability by saying the Fed has no tolerance for persistently elevated inflation. He’ll repeat that the Fed will get policy right without explaining what it actually means. Warsh called the economy resilient and growing at a solid pace while considering the labour market broadly stable.
News & Views
The small business economic trends index of the US National Federation of Independent Businesses for June rose more than expected to 97.4 from 95.3 in May, the best levels since February and nearing the LT average of 98. The rise was primarily driven by expectations for better business conditions and higher real sales expectations. The uncertainty index decreased from 91 to a still above-average of 89. The net percentage of firms expecting a better economy improved from 3% to 13%. Labour market indicators were mixed. 32% of small business owners reported job openings they could not fill in June, up 3 points from May, but still the lowest since May 2020. 21% (+ 3 pts) of business owners cited inflation as their single most important business problem, the highest reading since October 2024. The net percent of owners raising selling prices rose 2% to a net 38%, the fourth consecutive month that actual price increases have risen, marking the highest level since January 2023. A net 32% plan to increase prices in the next three months, down 2% from May’s highest reading since July 2022. As the survey was conducted during June, it evidently doesn’t capture the recent rebound in oil prices.
