Markets
The June US CPI inflation report rendered a huge downward surprise. A larger than expected decline in energy inflation pulled prices 0.4% lower M/M (vs -0.1% consensus) with the Y/Y-reading slowing from 4.2% to 3.5% (vs 3.8%). Underlying price growth was weaker than feared as well though with prices flat on the month and 2.6% higher Y/Y (from 2.9% vs 2.8% consensus). Details showed a broad-based impact with shelter costs being the most significant drag. Core goods prices were lower as well (used and new vehicles & apparel, home furnishings and prescription drugs standing out) with super core (services excluding airfare and lodging) inflation moderating. As several Fed governors hyped the core CPI number in the run-up, markets were positioned for an upward surprise. A 0.3% M/M core reading even had the potential of sealing the deal on a July Fed rate hike! Being wrong-footed by the number, the front end of the US yield curve rallied with the US 2-yr yield closing 8.9 bps lower. The intraday drop was larger, but partly compensated for by Fed Warsh’s semi-annual testimony before Congress. His comments closely echoed the ones from after the June FOMC meeting, but the anti-inflation rhetoric was slightly more forceful. He indicated “no tolerance” for persistently elevated inflation with a resolute commitment to restoring price stability. During the Q&A he also commented on the June CPI report saying it doesn’t mean mission accomplished. Warsh was slightly more upbeat on growth, referring to a solid instead of a moderate growth pace with a special mention of AI/capex investments. Prices for consumer electronics were by the way still contributing upward pressure on June CPI. The long end of the US yield curve didn’t really cheer the benign inflation print. The US 10-yr yield and 30-yr yield ended respectively 3.3 bps and 0.1 bp lower. Probably because of Warsh’s hawkish messaging and as energy prices remain upwardly oriented because of continuous attacks between the US and Iran in the Middle East including the reinstalment of the naval blockade. The energy story was key for European bonds yesterday which didn’t join the rally at the front end of the US yield curve. The relative loss of interest rate support pushed EUR/USD from below 1.14 to an intraday high at 1.1462. First minor technical resistance (1.1473) remained out of reach. Today’s eco calendar only contains second-tier numbers, leaving way for general (risk) sentiment to dictate intraday gyrations across markets.
News & Views
The Chinese economy grew 0.9% q/q in Q2, decelerating from Q1’s 1.3% and the slowest pace in more than two years. In y/y terms, GDP was 4.3% higher, below China’s 4.5-5% growth target for this year. That’s reviving calls for additional government stimulus even as 2026 growth so far is nicely within that corridor (4.7% YtD). The June economic update that accompanied today’s GDP release surprised to the upside in terms of retail sales, which defied expectations for back-to-back y/y drop by rising 1%. The industrial engine is humming at increased speed, 5.3% y/y vs 4.5% in Q1 amid exports soaring to record highs. But fixed asset investments continue to slump. The 5.7% drop was larger than expected and the biggest in the series stretching back to 1992, excluding the pandemic period. Property investment remains the poster child of weak capital spending, contracting at an unseen (even during Covid) 18%. The Chinese yuan reacted stoic with USD/CNY trading near the recent multiyear lows around 6.77.
IFO in a study released yesterday warned that “The European Union (EU) is at risk of failing to meet its own goal of becoming more independent with regard to critical raw materials”. IFO mentions that the EU accounts for more than 5% of global production for only four of the 27 critical raw materials examined. For nine of them, its share is zero. IFO researcher Gourevich advocates that Europe should have already established stable partnerships with resource-rich countries and systematically developed its own reserves, but so far there is little more than declarations of intent and too many uncertainties. The study also warns that the EU’s dependence on imports is very high, especially in future fields. Europe has to source almost all of the essential and in some cases rare raw materials for batteries, semiconductors, renewables, and defense from abroad. According to Gourevich, swift action is needed to ensure a supply at reasonable prices: “The EU should now back up its partnerships with resource-rich countries through actual projects and funding commitments. Announcements are no longer enough.”
 with the Y/Y-reading slowing from 4.2% to 3.5% (vs 3.8%). Underlying price growth was weaker than feared as well though with prices flat on the month and 2.6% higher Y/Y (from 2.9% vs 2.8% consensus).){kind=link}