First Light News: U.S. Inflation Surprises to the Upside
A wide range of developments unfolded yesterday, but it was the U.S. inflation report that took center stage. The much-anticipated June Consumer Price Index (CPI) data revealed that headline inflation rose 2.7% year-on-year (YoY)—exceeding Refinitiv’s median forecast of 2.6% and up notably from May’s 2.4%. Meanwhile, core inflation, which excludes food and energy, increased 2.9% YoY, slightly below the 3.0% consensus estimate.
Despite the clear inflation uptick, President Donald Trump downplayed price pressures, stating that consumer prices remain low. While inflation has indeed retreated from its 2022 peak of 9.1%, recent data suggests that tariff-related inflationary pressures may be returning. Trump also called for a 300-basis-point rate cut by the Federal Reserve, a proposal widely viewed as misaligned with current economic conditions.
Market reaction to the inflation report was initially muted. However, by this morning, investors had scaled back their rate-cut expectations. No change is now fully priced in for July, with 15 bps of easing priced for September and 44 bps by year-end, implying expectations for two rate cuts in 2025. This aligns with the cautious tone from the June 17–18 FOMC minutes, where a few members supported a July cut but most favored a more prudent approach.
UK Inflation Also Rises in June
June inflation figures out of the UK also pointed to persistent price pressures. Headline CPI rose to 3.6% YoY (up from 3.4%), and core inflation climbed to 3.7% YoY (from 3.5%). CPI services remained unchanged at 4.7%, signaling sustained underlying inflation.
Markets responded by slightly reducing expectations for Bank of England rate cuts, although two cuts remain priced in by year-end (-52 bps), with 20 bps expected in August. The British pound (GBP) showed little movement, reflecting market uncertainty over the BoE’s policy path amid sluggish UK growth prospects—a contrast to earlier years when such inflation data would have propelled GBP higher.
These numbers followed UK Chancellor Rachel Reeves’ Mansion House speech, where she proposed reforms to banking ring-fencing rules to stimulate “informed” risk-taking. However, her message appeared contradictory, given her recent £40 billion tax increase on businesses, including higher National Insurance contributions, with more potential hikes expected in August.
Looking Ahead: U.S. PPI & Corporate Earnings in Focus
Markets are now turning to the June Producer Price Index (PPI) data, due at 12:30 PM GMT. Economists expect a 0.2% month-on-month (MoM) increase (vs. 0.1% in May), while YoY PPI is projected to ease slightly to 2.5% from 2.6%.
It’s also a busy day for earnings, with reports due from Johnson & Johnson, Bank of America, Morgan Stanley, and Goldman Sachs.
In early European trade, U.S. equity futures are flat, with Nasdaq futures slightly lower. European indices are mixed: the DAX is flat, while the STOXX Europe 600 is down 0.1%.
Market Highlights
- U.S. Treasury yields bear-flattened yesterday, with the 30-year yield breaching 5.0%, a level that could attract long-duration bond buyers.
- The U.S. dollar (DXY) posted its fourth consecutive daily gain, rising 0.6%. While immediate resistance sits around 98.58, the longer-term target remains the 100.00 mark.
- Gold (XAU/USD) and Silver (XAG/USD) were slightly weaker, continuing their recent underperformance.
- In cryptocurrencies, major tokens rebounded today after a brief pullback yesterday.
