Cooler US inflation gives markets a bit of a breather
The US inflation pulse stole the spotlight yesterday, as the June CPI report came in softer than anticipated. In case you missed it: US June CPI 3.5% vs 3.8% expected
Despite what the headlines might suggest, the drop in June owes much to a marked fall in gasoline prices. Month-on-month CPI inflation fell by 0.4%, which was the biggest monthly drop since May 2020.
However, the US-Iran conflict has now restarted and oil prices have already climbed by roughly 14% already since the turn of the month in July. Adding to that, it’s tough to say if gasoline prices will continue to reflect more of this deflationary trend when the refining market remains ever so tight.
The only other good news is that core prices did cool as well, with not much evidence of a major boost from the World Cup. And tariffs inflation spillover continues to be at a minimum for the most part.
But if higher energy prices are going to stick around for longer, that will eventually translate to other segments of the economy and indirectly bolster price pressures down the road. So, there is that to keep in mind and be wary about.
For now though, markets can at least take a bit of a breather. However, I reckon that is all that the US inflation data will be able to afford traders and investors.
US stocks bounced back overnight with tech shares rebounding and futures are holding up again today. S&P 500 futures are up 0.2% with Nasdaq futures up 0.7%. But with Treasury yields slowly climbing back, it might be only a matter of time before the tide turns on risk sentiment. 10-year yields in the US are nudging back up to near 4.60% today. The post-CPI drop saw a fall to 4.525%.
Meanwhile, the dollar is also down slightly following the inflation numbers yesterday. That being said, it is not to say that the declines are anything too stark. USD/JPY continues to hang above the 162.00 level with EUR/USD settling around 1.1420-40, still keeping within the range of the past two weeks.
So as long as the US-Iran conflict continues to rage on, odds are higher oil prices and higher yields will eventually be what guides markets more than the latest US inflation data.
Swissquote is already warning that CPI is likely to be stronger again come July:
“Gasoline prices are already back above June levels, meaning the next inflation report will heat up again."
This article was written by Justin Low at investinglive.com.