Markets are exhibiting a degree of steadiness this morning after a period of volatility. Asia-Pacific stocks closed modestly higher, while bond yields and the US dollar saw some pullback. However, oil prices continue their upward trend, fueled by ongoing tensions in the Middle East. This market posture precedes two significant events scheduled for today: the June US CPI inflation report at 12:30 pm GMT and Federal Reserve Chairman Kevin Warsh's initial appearance before Congress at 2:00 pm.
The CPI report is expected to show a cooling in headline inflation, with the year-over-year rate projected to decrease to 3.8% from 4.2% in May, with estimates ranging between 3.6% and 4%. A genuine surprise would involve figures greater than 4.1% or at or below 3.5%. The core measure is forecast to ease to 2.8% from 2.9%, with most traders watching for 3% or above for a beat, or below 2.8% for a miss. Money markets currently anticipate a 0.1% fall at the headline level and a stable 0.2% for core CPI month-over-month.
Following the CPI release, Chairman Warsh will offer his first testimony. While he has stated he will not provide forward guidance, market participants will closely scrutinize his characterization of inflation and the economic trajectory, especially given recent hawkish repricing of Fed rate expectations. This comes after Fed Governor Christopher Waller indicated a potential need for increased Federal Funds Rate if inflation persists. The OIS market is pricing in 35 basis points of hikes by year-end, with a 30% probability of tightening this month and a full 25 basis point hike priced in for September. The lack of explicit forward guidance from the Fed suggests that today's CPI release and Warsh's comments will likely induce heightened market volatility.
Geopolitical events continue to influence market sentiment, with Monday seeing a "risk-off" environment driven by Middle East tensions. This led to a bear flattening in global bond yields, a strong rally in oil prices, and a bolstered US dollar. Oil benchmarks are firmly north of their 200-day Simple Moving Averages. Brent crude climbed 4.3% to $86.90 a barrel, after soaring nearly 10% on Monday, and US crude oil topped $80 for the first time in a month. These oil price increases have reignited inflation concerns and contributed to a hawkish repricing of Fed rate expectations, as seen in the approximately 50% probability of a July rate hike in Fed funds swaps. Additionally, five major banks, including JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, and Bank of America, are reporting Q2 2026 earnings today, officially commencing the corporate earnings season.
