June CPI Rises Less-Than-Expected

MACRO FRAME

The military exchanges between the US and Iran re-inflate the geopolitical risk premium in energy and add a hawkish skew to the macro backdrop.

STOCK INDEX FUTURES

Equity index futures moved higher in response to this morning’s inflation data after choppy trader overnight that saw the S&P and Dow underperform. June’s CPI report came in lower-than-expected, with core inflation making no moves on the month, while the headline figure fell -0.4% thanks to a fall is energy prices. However, against the current backdrop and rise in energy prices, traders and policymakers at the Fed could discount this reading depending on the scale of the renewed hostilities between the US and Iran and whether or not the rise in oil prices is contained.

IBM took a hit premarket after a weak Q2 pre‑announcement and guidance that late‑quarter capex was diverted toward AI infrastructure rather than software. At the macro level, the tape remains caught between strong reported earnings and still‑resilient activity, highlighted by JPMorgan’s better‑than‑expected results and Dimon’s description of an economy supported by firmer business investment and hiring, and a growing list of “tectonic” risks, from the renewed US–Iran escalation around the Strait of Hormuz and a fresh oil spike into the high‑$80s, to sticky inflation, wide fiscal deficits and elevated asset prices. Chair Warsh’s testimony later today will be closely watched and could shape how far the market leans into the idea that higher energy and geopolitics could eventually force the Fed to validate the hawkish rate path that’s already priced, just as the AI capex boom is starting to create visible winners and losers within tech.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index is 0.55% lower to 100.68 on the back of June’s inflation data. Core inflation is proving to be the largest mover of the dollar today with its weaker-than-expected reading. However, rising oil prices and the geopolitical bid are supportive for the dollar and are likely to limit losses. Elsewhere, Warsh’s testimony later today is likely face scrutiny from lawmakers and will be closely watched for his intentions on monetary policy. For the dollar, unlike earlier phases of the conflict, the dollar is starting from a stronger base and with expectations of Fed tightening already priced in, so the scope for an additional war-driven surge is limited. The bias for the dollar is higher given Fed policy expectations and interest rate differentials that remain favorable to the dollar. Markets are pricing roughly 33 bps of Fed tightening priced by December, more or less where the market was at last week. The next catalyst for a move in the dollar will be PPI (Wednesday), and Warsh’s testimony to Congress later this morning for validating or challenging a path higher.

Watch point: June’s inflation data is bearish for the dollar, though the report’s impact may be partially overshadowed by the current geopolitical backdrop and the rise in oil prices.

EURO: The euro is 0.52% stronger to $1.1441 on the back of US inflation data. Final CPI figures for several countries and the eurozone (Friday) will be closely watched for rate-hike timing expectations out of the European Central Bank though like mentioned earlier, against the current geopolitical backdrop and rise in energy prices traders and policymakers could discount the most recent inflation data if energy prices continue to rise. Industrial production figures tomorrow will also be closely watched as to how the growth narrative has been impacted by higher energy prices, any downside in the reading reinforces the stagnation narrative. Expectations that the ECB will hike rates one more time before the end of the year have firmed with traders now pricing around 38 bps of tightening by December 60 bps of tightening by April 2027. Despite today’s strength, dollar fundamentals remain favorable against the euro.

Watch point: With the MOU seemingly done with, policy expectations are biased upwards though performance of EUR remains dependent on US inflation data and domestic growth factors.

BRITISH POUND: Sterling is 0.67% stronger at $1.3435. Absent today’s dollar weakness, higher oil and increased geopolitical risk, is in principle , more negative for the sterling than dollar strength alone given the UK’s reliance on imported energy and sticky domestic inflation. Focus now centers on politics: Andy Burnham is expected to become prime minister on 20 July, with markets highly sensitive to his choice of chancellor/finance minister. The current favorite is  Ed Miliband. Traders have increased bets on Bank of England rate hikes, pricing roughly 43 bps of tightening. Monthly GDP data due later in the week will also be watched for signals on the “stagflation‑lite” narrative, while a stronger print would support the idea that the economy has retained more resilience than feared.

JAPANESE YEN: The yen strengthened 0.30% to 161.81 yen per dollar.

Talk regarding comments from Finance Minister Katayama about encouraging pension funds (including GPIF) to allocate more to domestic assets have been supportive of the yen, though any near-term changes to the plan are unlikely. Additionally, any shift will be incremental within existing ranges. For the yen, bearish pressure in expected to continue in the near-term. The JGB market will help lead JPY direction this week with a 20-year JGB auction on Tuesday; weaker demand could support upward pressure on yields and the currency, while the yen could receive some limited support from a strong auction result. Investors also await official intervention data later this month to determine whether the government was behind the yen’s sharp but short-lived rally on July 2. The market little changed regarding Bank of Japan policy expectations, pricing about 22 bps of tightening by year-end, with a move expected to come in January of 2027.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.75% higher at $0.6969, gaining on a weaker dollar post-June CPI. Traders are still pessimistic over prospects of any tightening from the Reserve Bank of Australia. Markets are pricing a 46% chance of a hike before year-end and are flirting with the idea of rate cuts in late 2027. A survey of businesses out on Tuesday showed conditions remained soft in June, before the renewed fighting in the Gulf, while cost pressures eased modeslty. Meanwhile, a separate survey showed the mood among consumers improved a little in July, but again that will be challenged by rising fuel prices. Renewed fighting in the Gulf presents a bearish risk for the Aussie. US-Iran developments will be closely watched in another thin week of economic data in Australia. With markets awaiting further data on the economy, the Aussie is likely to remain subject to geopolitical developments, mainly regarding moves in oil.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields moved lower across the curve post June CPI release. The June print is unambiguously softer than May on a headline basis, but the disinflation story is still incomplete. Headline at 3.5% YoY is meaningfully above the Fed’s 2% target, core at 2.6% is trending in the right direction but driven in part by volatile goods deflation, and the two most persistent components, shelter and supercore services, remain entrenched above 3%. New Fed Chair Kevin Warsh has explicitly signaled concern about the multi-year overshoot of the 2% target, meaning a single soft month is unlikely to shift the policy calculus materially. That dynamic alone appears strong enough to encourage the Fed to retain a hawkish bias. The disinflation path remains slow and non-linear. Consumer inflation expectations are also drifting higher as the NY Fed’s latest survey showed 1-year expectations at 3.7% (highest since September 2023) and 3-year expectations at 3.3%, a dynamic Warsh will be watching closely given his 2% mandate commitment. Elsewhere, Fed Governor Waller said rates may need to rise “in the near term” if data shows inflation remaining well above the central bank’s 2% target. While the market is treating this report bullishly, geopolitical risk and the rise in energy prices, as well as the slow progress in taming core inflation should not be overlooked.

Watch point: Mainly, the renewed fighting and prospect that some inflation remain sticky reinforce a hawkish backdrop for the Fed despite a drop in the headline reading.

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