Chips and Banks

Ipek Ozkardeskaya ipekScope

US inflation came in softer than expected yesterday. But not only that. The monthly figure printed a negative reading – the most negative in six years. The biggest explanatory factor was the fall in energy prices. As mentioned yesterday, US crude fell around 25% in June, pulling US gasoline prices down by around 10%, and the latter was clearly reflected in the data.

Looking at the yearly figures, headline inflation sank from 4.2% to 3.5%, well below the 3.8% expected by analysts, while core inflation eased from 2.9% to 2.6%, also notably below the 2.8% pencilled in by analysts. In fact, the core figure fell back to pre-Iran war levels.

To my surprise, the data tamed hawkish Federal Reserve (Fed) expectations, leading to a sharp pullback at the short end of the US yield curve. The US two-year yield, which best captures Fed rate expectations, fell 10bp. Activity in Fed funds futures is now pricing the probability of a September rate hike at 60%, down from 77% before the CPI release.

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Author

Ipek Ozkardeskaya

ipekScope

Ipek Ozkardeskaya began her financial career in 2010 in the structured products desk of the Swiss Banque Cantonale Vaudoise. She worked in HSBC Private Bank in Geneva in relation to high and ultra-high-net-worth clients.

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