US stocks ended the day lower, with Nasdaq reaching a new intraday high before declining. Crude oil closed at $63.96, and tariff revenues from Trump reached $29.6 billion in July. Major European indices had mixed outcomes, while Trump extended China tariff deadlines by 90 days. He announced that gold would not be subjected to tariffs and sent the National Guard to Washington DC.
The US dollar strengthened against major currency pairs, rising 0.34% against NZD and 0.18% against AUD. The Reserve Bank of Australia is likely to cut rates by 25 basis points due to 2.1% inflation and weaker employment data. The upcoming US CPI release anticipates a 0.2% month-to-month increase and a 3.0% rise in core inflation year-on-year.
Goods Inflation and Services Inflation
Goods inflation shows moderate growth, with core goods prices increasing by 0.2% m/m in June. Services inflation, driven by shelter costs, rose by 0.3% m/m. Shelter costs saw a slight rise of 0.2%, the smallest since August 2021, affecting 34% of the CPI weight.
Trump granted a 90-day reprieve on increased China tariffs, and progress was reported on Ukraine-Russia peace talks. US stock indices closed modestly lower, with minimal changes in bond yields. Dow was down by 0.45%, S&P by 0.25%, and Nasdaq by 0.50%.
All attention this week is on the upcoming US CPI report. Expectations for a slight rise in core inflation to 3.0% are creating tension, and a number that surprises to the upside will likely increase market volatility and push bond yields higher. The VIX volatility index closed today at 17.5, reflecting this unease, with options pricing suggesting a larger-than-average move for the S&P 500 following the release.
We are watching to see how this inflation data shapes the Federal Reserve’s path, especially following the poor jobs report earlier this month. A tame inflation reading, particularly if core goods prices remain soft, could boost expectations for a rate cut later this year. Currently, Fed Fund futures are pricing in about a 40% chance of a rate cut by December, a figure that will see a significant revision after tomorrow’s data.
The US Dollar and Currency Pairs
The US dollar is showing strength ahead of the report, but this position is vulnerable. We see the RBA’s expected rate cut creating a clear policy difference with the Fed, which could further boost the AUD/USD pair if US inflation is strong. We believe positioning for higher volatility in major currency pairs like EUR/USD and USD/JPY through simple options strategies could be a prudent way to trade the event.
Equity markets are showing some nervousness, with the Nasdaq retreating from its highs today. A hot inflation print would likely pressure technology and other growth stocks that are sensitive to interest rates. The 90-day tariff delay on Chinese goods is a positive, removing a headwind for industrial sectors, especially since China’s latest manufacturing PMI reading of 49.8 showed its economy could use the relief.
Geopolitical risks appear to be easing for now, which could lower implied volatility over the coming weeks. The extension of the China tariff deadline and the planned talks with Russia are reducing near-term uncertainty for the market. However, the domestic situation with the National Guard deployed in Washington D.C. introduces a background risk that is difficult to price.
