- The new month has been bearish for interest futures.
- The CPI report revealed that inflation increased by 3.5%, below the estimate of 3.8%.
- If oil continues climbing, inflation might spike again.
Interest futures fell on Thursday as focus shifted from US inflation figures to the Middle East conflict. The renewed tensions between the US and Iran have caused a spike in oil prices and inflation worries that have sent Treasury yields higher. However, on Tuesday and Thursday, they fell as interest futures rose after soft US CPI and PPI data.
The new month has been bearish for interest futures as the war in Iran started again soon after a new ceasefire deal. Tensions reignited after three tankers were hit near the Strait of Hormuz. Within a few days, missiles and drones were flying as the two hit various targets in Iran and the Gulf countries.
This was a sudden shift from the optimism in June when the two countries were nearing a deal to end the war. Throughout the month, market participants had paid close attention to their talks, which progressed well. The US and Iran eventually signed a memorandum of understanding that extended their ceasefire by 60 days.
At the same time, it called for the reopening of the Strait of Hormuz, easing inflation concerns. After the deal, talks continued, and more progress was made, including the lifting of sanctions on Iranian oil. Until this point, all had been going well, and the future looked bright. Inflation worries eased, and rate hike expectations dropped. As a result, Treasury yields collapsed while interest futures soared.
However, things started falling apart quickly, and market participants were grappling with an uncertain outlook. Risk appetite dropped, and inflation worries reignited. Fortunately, there was a brief respite when the US released its inflation figures.
Treasury yields (Source: Bloomberg)
On Tuesday, the CPI report showed inflation rose 3.5%, below the estimate of 3.8%. On a monthly basis, price pressures eased by 0.4%, compared to the forecast of a 0.1% decline. Furthermore, the wholesale inflation report revealed a 0.3% decline in June when experts were predicting no change.
The downbeat numbers eased expectations for Fed rate hikes this year, sending Treasury yields lower. Meanwhile, interest futures climbed. However, the data has not captured the recent flare-up in hostilities in the Middle East. If oil continues climbing, inflation might spike again, sending interest futures lower.
