The main market mover this week was the signing of a memorandum of understanding Working to reach a permanent peace agreement between the United States and Iran. The interim agreement ends all military actions and opens the Strait of Hormuz while the two sides negotiate a final agreement in a “maximum” period of 60 days. Traffic through the SoH area is showing early signs of normalizing, but markets are still monitoring how quickly supply returns and progress on the final agreement, with the issue of Iran’s stockpile of nuclear materials in particular remaining a sticking point. The spot price of Brent crude fell to about $80 per barrel compared to $70 per barrel before the war.
The US Federal Reserve remained steady at 3.50-3.75%, as expectedwhere Warch’s first meeting provided a much shorter statement with no advance guidance but no surprises on balance sheet policy. Warsh did not provide his forecasts, but the forecasts of other members revealed a clear hawkish bias, with nine members expecting an interest rate hike this year and six of them seeing more than one, along with expectations of higher inflation. The meeting was a clear step away from traditional forward guidance, but Warsh emphasized a strong focus on getting inflation back on target. Markets reacted dovishly with US Treasury yields rising significantly and the EUR/USD pair weakening, now pricing in the potential for a further rate hike.
The Bank of England (BoE) kept interest rates unchanged At 3.75% as was widely expected. The decision was taken by a vote of 7 to 2, with Bell and now Green also voting in favor of a rate hike to “insure against the possibility of greater runoff effects.” We expect interest rates to remain unchanged next year while markets expect a full hike by the end of the year. In Japan, The Bank of Japan decided to raise interest rates by 25 basis points to 1.0%.the highest since 1995. The vote split was 7-1, and the Bank of Japan signaled further rate hikes and outlined a gradual reduction in Japanese government purchases, effectively halting the QT period from 2027. Market reaction was modest, leaving USD/JPY just above 160.
Regarding data releases, US retail sales numbers rose more than expected, marking a fourth straight strong month, as households ramped up car purchases despite higher gasoline prices. In the eurozone, final inflation data for May confirmed that surprisingly strong services inflation reached 3.6% year-on-year and details revealed that it was indeed a strong figure, and was not driven solely by one-offs or seasonality expected to reverse in June. China’s latest monthly releases highlighted the deepening two-speed economy. Retail sales fell from 0.2% y/y in April to -0.6% y/y in May, while real estate investments fell further and new home prices continued to decline, although sales appear stable. In contrast, industrial production accelerated to 4.5% y/y from 4.1% y/y, driven by strong exports.
Next week, key data will be released that you should pay attention to These are June flash PMIs for major economies. We also get May US PCE inflation and Eurozone consumer confidence as well as the European Central Bank’s Consumer Expectations Survey.
