US consumer prices fell in June for the first time in six years. Core inflation remained broadly unchanged, a development that is expected to be welcomed by Fed officials ahead of the upcoming policy meeting.
Following the data, Treasury bonds rose throughout the US trading session, with yields falling sharply as traders cancelled bets that the Fed would raise interest rates as early as this month. The US dollar strength indicator also recorded its worst day in almost two weeks, while gold prices rose more than one percent to above USD4,050 an ounce.
In our view, the softer CPI data was a major relief for the market. While the report will not completely end the talk of a possible monetary policy tightening, it is expected to successfully remove the possibility of a July interest rate hike from the Fed’s consideration.
Iran Tensions Continue to Overshadow Oil Markets
West Texas Intermediate crude oil prices rose slightly in the early Asian session, following the US confirmation that it would resume naval sanctions on ships passing through Iranian ports and coastal areas. The US also launched new attacks on Iran at the same time.
Oil product markets in the US and Europe are now showing signs of high supply shortages due to escalating tensions in the Middle East, a situation that has the potential to add to the burden on consumers already affected by high fuel prices.
The situation has also become more complicated when Russia is reported to be facing difficulty in selling all of the crude oil it has been forced to export, following the increasing number of Ukrainian drone attacks on its refineries.
Warsh's Warning, Its Impact on the Ringgit
In his testimony before members of Congress, Fed Chairman Kevin Warsh stressed that central bank authorities will not compromise on high inflation, thus reiterating his commitment to controlling price increases.
According to Intraday analysis, although this CPI data reduces pressure on the Fed to raise interest rates in the near future, continued tensions in Iran mean that the possibility of interest rate hikes is not yet completely over. The path for the Fed to keep interest rates unchanged for the rest of the year remains open, but the re-escalation of the conflict has narrowed that path.
For the Ringgit, this mixed development has also had its own repercussions. Soft inflation data tends to weaken the Dollar and give the Ringgit some breathing room. However, ongoing risks in the Strait of Hormuz and tight energy markets could undo some of the relief through rising energy import costs for the country.
Key Takeaways
US CPI data recorded its first decline since 2020, with core inflation remaining broadly unchanged.
Treasury bonds rose and the Dollar weakened after traders cancelled bets on a July Fed rate hike.
WTI oil prices rose slightly on US naval sanctions on Iran and the launch of new attacks.
Distillate oil product markets in the US and Europe showed the highest supply tightness due to Middle East tensions.
Kevin Warsh's dovish remarks showed the Fed remains wary of inflation, although pressure for an immediate rate hike has eased.
This soft inflation data gives the market some breathing room, but it is not a sign that the danger has completely passed, as geopolitical tensions in the Middle East still cast a shadow over the market's direction in the near term.
