Markets steady this morning following Middle East tensions, US CPI and Warsh Testimony eyed

Risk-off session grips market on Middle East escalation

Monday brought a clean risk-off environment amid tensions in the Middle East. This sent US equity benchmarks southbound, triggered a bear flattening in global bond yields, underpinned a strong bid in Oil benchmarks – manoeuvring firmly north of their 200-day SMAs – and bolstered the USD.  

The latest news from the Gulf indicates that President Trump plans to reinstate the Iranian blockade today at around 9 pm GMT. In a social media post, he also said that the US will essentially take the reins here, providing safety for other vessels crossing the Strait of Hormuz for an eye-watering 20% fee. There are obviously still a lot of questions around this and, of course, how it would be implemented. 

He also stated that the US will now be known as the ‘GUARDIAN OF THE HORMUZ STRAIT’. I do not see this playing out well, and should this blockade come into effect, I would expect conflict to worsen from here. This comes alongside the US launching a fresh wave of missile attacks on Iranian cities, while Iranian forces launch strikes across the UAE. Ceasefire? What ceasefire!

Things are a little steadier this morning, however, with Asia-Pac stocks wrapping up modestly bid, yields and the USD pulling back, but oil is still higher. This comes ahead of two key events today: the June US CPI inflation report at 12:30 pm GMT and Fed Chairman Kevin Warsh's first appearance before Congress at 2:00 pm.

Key US CPI inflation report on deck

For the CPI report, per the LSEG calendar, YY headline inflation is expected to cool to 3.8% from 4.2% in May, with the estimate range between 3.6% and 4%. According to the forecast distribution, to create a genuine surprise, we would need to see greater than 4.1% or at (or below) 3.5%. 

The YY core measure is forecast to ease to 2.8% from 2.9%. However, per the estimate distribution, only a small percentage forecast 3%, while the majority expect either 2.9% or 2.8%. Therefore, most traders will be watching for either 3% or above for a beat (this would mark a new cycle high) or below 2.8% for a miss. 

MM expectations suggest a 0.1% fall at the headline level, down from 0.5% in May, with the MM core forecast remaining unchanged at 0.2%. 

With the lack of forward guidance from the Fed, we can expect heightened volatility around tier-1 event risk, such as today’s CPI release. Previously, markets relied on explicit guidance from the central bank, essentially spoon-feeding participants on how to respond. Now, markets must respond to the raw data and assess how the Fed will react to the results. 

Heading into the event, we have also seen a sizeable hawkish repricing of Fed rate expectations, following renewed inflation fears from rising energy costs and recent comments from Fed Governor Christopher Waller. He noted that the Fed may need to increase the FFR if inflation continues to run hot. Waller stated that he would be ‘very pleased’ to see core metrics ease following the first-half move higher. 

The OIS market is pricing in 35 bps of hikes by year-end, up from about 20 bps just a week ago. There is approximately 8 bps of tightening implied for this month’s meeting (30% probability), and September is now fully priced in for a rate hike (25 bps). 

A CPI beat would likely trigger a solid move higher in yields (as traders increase bets for a July hike) and the USD, particularly as the release is widely expected to show softening. However, it is also important to understand how the markets are positioned. According to the latest CFTC data, the USD is one of the most overstretched DM currencies to the upside, meaning the market is already heavily long the USD. Does this mean it cannot rally further on a strong beat? No, it simply means that traders need to remain aware of the risk. However, a data miss could prompt a notable unwind of long positions.  

Fed chairman Warsh steps up

For Warsh’s testimony, he will take centre stage approximately 90 minutes after the US CPI report lands. Unless you have been hiding under a rock, you will already know that Warsh has explicitly emphasised he will not provide forward guidance. However, market participants will be watching how he characterises inflation and the economy’s trajectory today, given the unease among a number of Fed policymakers about inflationary pressures. 

Clearly, his comments will matter given the hawkish Fed repricing. Additionally, markets will be closely monitoring for any developments on Warsh’s reform agenda, particularly the five task forces. Ultimately, with Warsh taking forward guidance off the table, these hearings may offer the clearest picture of how the new Chairman is framing the economic outlook and the future path of rates. 

Earnings season kicks off

Finally, five major banks report Q2 26 earnings today, including JP Morgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS), and Bank of America (BAC). This officially kicks off the corporate earnings season, with market participants closely watching for growth and consumer health.