There were three key main events on Wednesday. US CPI was cooler than expected, US/China agreed on a deal, while Middle East concerns escalated. The US CPI came in softer than analyst expectations in May, despite the imposition of tariffs in April, showing that consumer prices are still not being greatly affected by US President Trump’s tariffs so far. PPI will be viewed this afternoon to see how producer prices are faring. In response to the report, stocks caught a bid while the Dollar was sold and T-notes rallied. Stocks failed to hold onto gains by the close, with equities closing in the red due to downside in US trade sparked by the increased Middle East tensions, which saw crude prices rally. Several reports indicated some form of evacuation of US personnel from the Iraq embassy, and also an authorised departure of nonessential personnel and family members from Bahrain and Kuwait, sparking fears of a potential upcoming military action on Iran, albeit this is yet to be confirmed. Geopolitical analysts appear to have a mixed view, with some warning it could reflect a major threat (like an Israeli strike on Iran if nuclear talks fail), or others suggest perhaps it is a negotiating tactic ahead of talks on Sunday. Nonetheless, the heightened risk pressured stocks but led to a strong upside in Crude, while Gold and T-notes also moved higher. On US/China, the talks in London concluded and the US maintained its current tariffs on China that were implemented after the meeting in Geneva, while China agreed to export rare earths to the US. However, the deal still needs to be signed off on by both US President Trump and China President Xi. In FX, the dollar was sold on the CPI report while the Euro and Pound outperformed, but Antipodes lagged. Overall, CPI was soft. The headline rose by 0.081%, beneath the 0.2% forecast and down from the prior 0.221%. The Y/Y print rose to 2.4% from 2.3%, but it was beneath the 2.5% forecast. The core prints were also soft, rising 0.13% M/M, down from the 0.237% prior, beneath the 0.3% forecast. The report welcomes the Fed’s fight against inflation and shows that any tariff impact is yet to be felt. However, the Fed’s Beige Book saw that contacts who expect to pass on prices to customers expect to do so over the next three months. Therefore, more data is likely needed to assess the full tariff impact. Nonetheless, the fact that prices are not largely accelerating as tariffs are implemented may help the Fed spot the tariff-related price increases, and it can then assess whether to look through them or not. However, many have argued against doing this, aside from Governor Waller, who argues the tariff-related price increase should be viewed as a one-time event. Attention will turn to the PPI data on Thursday to see how much prices for firms have increased in the wake of tariffs. The PPI will likely be impacted by tariffs first, before CPI. Regarding the implications for the Fed’s preferred gauge of inflation, Core PCE, Pantheon Macroeconomics expect it at 0.2% after the CPI report but notes it may be updated after PPI. In regards to the Fed, there was a brief dovish reaction to money market pricing, which went back to fully pricing in two rate cuts this year. Elsewhere Oil surged, closing higher by 4.5% while Gold ended Wednesday’s session with a gain of 0.75%.
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