US
Crude oil prices surged to a one month high as the US-Iran battle to become “Guardian” of the Strait of Hormuz intensified. US Central Command forces will resume blockading maritime traffic entering and exiting Iranian ports starting today at 4:00pm ET. President Donald Trump also flagged a 20% fee on all cargo transiting the waterway. Iran’s foreign minister pushed back, insisting it alone is responsible for the Strait’s security adding “20% is of course too much. We will be fair.”
The rebound in crude oil prices is worsening the inflation outlook, pushing bond yields higher across the curve and weighing on major equity markets. USD pared back some of yesterday’s gains triggered by heightened geopolitical risks. We see scope for further USD gains in the next couple of months. Sticky US inflation and a resilient labor market will keep Fed pricing hawkish, while US economic outperformance is poised to keep rate differentials supportive of USD.
Today, the US June CPI data will help shape near-term Fed funds rate expectations (1:30pm London, 8:30am New York). Headline CPI is expected to fall -0.1% m/m vs. 0.5% in May on lower gasoline prices, to be up 3.8% y/y vs. 4.2% in May. Core CPI is seen rising 0.2% m/m and print at 2.8% y/y vs. 2.9% in May. Overall, the disinflation trend has stalled even when looking at CPI measures which filter out extreme price swings, like trimmed mean, median, sticky, and super core.
Fed Governor Christopher Waller warned yesterday “If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term.” Fed funds futures price in 43% odds of a 25bps hike to a target range of 3.75-4.00% at the next July 29 FOMC decision and nearly 50bps of tightening by year-end.
Fed Chair Kevin Warsh’s testimony before the House Financial Services Committee will add another layer of volatility today (3:00pm London, 10:00am New York). Warsh is expected to reaffirm the Fed’s unwavering commitment to its 2% inflation target, supporting a higher for longer policy stance. Warsh may also be pressed on his five task forces and what it could mean for the future conduct of monetary policy.
UK
Long-end gilts are lagging global peers reflecting the UK’s stickier domestic inflation backdrop and a higher political risk premium. Andy Burnham is due to take office as prime minister on July 20. Burnham leans towards higher spending and borrowing.
The choice of chancellor will determine the extent of the hit to UK fiscal credibility. According to a Bloomberg poll, Energy Secretary Ed Miliband – the frontrunner for the role - is seen as the least market-friendly choice. Ex-Health Secretary Wes Streeting is considered the most market-friendly choice.
JAPAN
USD/JPY continues to trade near a 40-year high above 162.00 while JGBs are outperforming across the board. 20-year JGB yields dropped as much as 18bps to 3.56% on solid buying interest from investors. The 20-year bond sale's average bid-to-cover ratio was 4.52 vs. 2.97 in June, the highest since April.
Moreover, Japan Finance Minister Satsuki Katayama doubled down on her recent comments to encourage Japanese households and pension funds to invest more at home. Katayama floated the idea of adding government bonds to a tax-free investment program for individuals and said “it’s possible the portfolio [of the Government Pension Investment Fund, GPIF] could be reviewed and, if necessary, revised.”
GPIF sets its asset allocation mix every five years and reviews it annually. In March 2025, the ¥294tn ($1.8tn) fund decided to keep allocating 25% each to domestic bonds, foreign bonds, domestic equities and foreign equities. For domestic bonds and stocks, the deviation limits to the target allocation is +/-6%.
Japan is one of the world’s largest net creditors with net foreign assets totaling roughly $3.6 trillion in Q1 or 83% of GDP. As such, even a modest portfolio repatriation could generate meaningful JPY and JGB demand.
AUSTRALIA
AUD/USD retraced most of yesterday’s loss supported by firmer iron ore prices. The June NAB business survey results and July Westpac consumer sentiment index remain consistent with a soft growth outlook. Business confidence recovered most of the large drop in March, but business conditions were unchanged at +3pts for a third consecutive month and remain below the long run average of +7pts. In parallel, the consumer sentiment index rose to 83.9 vs. 80.6 in June but is still well below the long run average of 100.2.
RBA cash rate futures imply 65% odds of one final 25bps hike by year end to 4.60%. In our view, the risk is skewed towards a more extended pause in the RBA tightening cycle which is a headwind for AUD. First, the RBA projects real GDP growth to be below potential over the next two years. Second, the RBA cash rate at 4.35% currently sits near the top of the range of model-based central estimates of the nominal neutral rate.
NEW ZEALAND
NZD is outperforming all major currencies. RBNZ Chief Economist Paul Conway reinforced the bank’s hawkish bias. Conway warned that “monetary policy may need to respond more firmly to re-anchor inflation expectations” and curtail the risk that temporary inflation shocks become persistent. Conway noted that “businesses pass on cost increases more readily now than in the past and are less likely to reduce prices when costs ease.”
The RBNZ has room to normalize the Official Cash Rate (OCR) to more neutral levels which is NZD supportive. New Zealand inflation is still above target, and economic activity is expected to strengthen. The RBNZ estimated neutral range is between 2.2% and 4.1%. The swaps curve implies 100bps of tightening over the next twelve months, nearly twice as much as the RBNZ policy path projection published in May.
