USD Index Firms After Volatile Inflation Reaction

STOCK INDEX FUTURES

Stock index futures are higher, with the Dow lagging in negative territory, getting a boost from a CPI inflation reading that saw prices rise in line with expectations. CPI inflation rose 0.3% in June while ticking higher to 2.7% on an annualized basis. The Nasdaq got a boost early in the morning after Nvidia said it plans to resume sales of its H20 AI chip in China after securing Washington’s assurances that shipments would get approved. The move is a sharp reversal from the Trump administration’s earlier stance, which restricted exports of Nvidia’s advanced chips.

Second-quarter earnings at JPMorgan Chase were better than expected Tuesday, as investment banking revenue at JPMorgan rose 8% from last year’s second quarter to $2.5 billion due largely to advising on mergers and equity underwriting. Bond underwriting fell 2% but still exceeded analyst expectations. CEO Jamie Dimon also noted that “significant risks persist” in the economy and that the threats from tariffs, high fiscal deficits, and elevated asset prices remain.

Mexico’s President Claudia Sheinbaum said that she believed Mexico and the US were close to finalizing an agreement on security and trade and expected it to be signed before the August 1 deadline when the new tariffs are set to take effect.

Data from FactSet published July 3 showed analysts are coming into second-quarter earnings season expecting 5% earnings growth for the S&P 500. Should this forecast come through, it will mark the slowest pace of profit growth since the fourth quarter of 2023. Second quarter earnings include President Trump’s “Liberation Day” tariff announcement, which seeded uncertainty in the market preceding a historic rally. Looking forward, in the third quarter, analysts are expecting earnings will grow 7.3% over last year. Full-year profit growth is expected to clock in at 9%, according to FactSet data.

Other data on economic activity includes June industrial production on Wednesday and June retail sales data on Thursday. The University of Michigan’s July preliminary consumer survey on Friday will give a more up-to-date snapshot of consumer sentiment.

CURRENCY FUTURES

The USD index is edging out some gains following a volatile reaction to Tuesday’s inflation data, which saw prices increase across most sectors. The reading largely reinforces the Fed’s expectations that prices would rise later in the summer as the effects of tariffs make their way into the economy. Focus now turns to PPI inflation data due tomorrow and retail sales and jobless claims data due Thursday. President Trump announced a 30% tariff on the EU and Mexico over the weekend, while officials from both countries signaled their intent to keep negotiations going. Reactions in the currency market to the news were largely muted.

Euro futures are little changed against the dollar, edging out some gains after the dollar broadly weakened against most other major currencies. Industrial production in the eurozone partly rebounded from a tariff-induced slump in May, with production rising 1.7% from April, although trade is likely to face headwinds from tariffs moving forward. The increase in orders was boosted by tariff frontrunning, with pharmaceuticals making up the majority of factory output. Trump threatened 30% tariffs against the trade bloc. The EU extended its pause on retaliatory measures to US tariffs until early August and continues to push for negotiations. Markets have grown increasingly desensitized to tariff threats out of the White House. The final estimate of eurozone inflation for June is due on Thursday. Provisional data showed annual inflation crept up to the European Central Bank’s target of 2.0% last month.

British pound futures are higher, getting a boost from a weaker dollar following Tuesday’s inflation data in the US. Bank of England Governor Andrew Bailey made comments that signaled the central bank is prepared to make deeper interest rate cuts if the labor market weakens further. Bailey said the UK economy is underperforming its potential, creating slack that should help ease inflation, and reiterated that the rate path is “downward,” while leaving the door open to faster easing if conditions worsen. Bailey will give his annual “Mansion House” address to London’s financial sector on Tuesday, along with Finance Minister Rachel Reeves. UK inflation data is due Wednesday; the figures are expected to attract close attention given the concerns about inflation being too high and economic growth too weak, and the implications for the BoE. Annual CPI inflation has risen in recent months and last stood at 3.4% in May, well above the Bank of England’s 2.0% target. Jobs data is due Thursday, and markets will watch for signs of weak employment growth and wage growth. Recent data has shown the economy contracted again by 0.1% in May. UK money markets are pricing a 78% chance of a 25 basis-point rate reduction in August. Investors still remain concerned over the outlook for the UK economy, in light of weak economic data and tighter fiscal conditions after a landmark welfare benefits bill strained the government’s finances.

Japanese yen futures are lower, as pressure from the upcoming election on Sunday and fiscal concerns mount on the yen. The yield on the 20-year Japanese government bond surged to its highest since 2000, and 30-year yields neared an all-time high hit on May 21, as concerns grew that an upcoming election there could pave the way for increased fiscal spending. There is lots of speculation that the ruling coalition will lose its majority in the Upper House and the new ruling party will increase fiscal stimulus and create tax cuts. Data due Friday is expected to show that inflation continues to rise. Core consumer prices, excluding fresh food, are forecast to have increased 3.4% in June from a year earlier, compared to a 3.7% rise in May. Despite stronger inflation, uncertainty over the trade picture with the US means the Bank of Japan is unlikely to rush into an interest-rate hike. Trade data due Thursday may show a further slowdown in exports in June, after a 1.7% fall in May from a year earlier. On Friday, the BoJ is scheduled to conduct outright purchases in four sectors of the Japanese government bond market.

Australian dollar futures are higher as the currency strengthened against the dollar, paring some losses from yesterday. The Westpac-Melbourne Institute Consumer Sentiment Index rose by 0.6% month-over-month to 93.1 in July, a third straight monthly gain, signaling a small improvement in consumer outlook. Markets now turn their attention to Australian employment and inflation data due Thursday for signs of relief in prices as markets expect the Reserve Bank of Australia to cut interest rates in August, data dependent. The labor market in Australia has remained resilient over the past year, although worries of a slowdown have appeared in some forward-looking indicators.

INTEREST RATE MARKET FUTURES

Futures are higher across the curve as CPI inflation in June came in line with expectations, rising 0.3% in June after rising 0.1% in May. Inflation ticked up to 2.7% on an annualized basis. Core CPI inflation rose 0.2% in June, below expectations of a 0.3% rise, while core prices ticked higher from 2.8% to 2.9% on an annualized basis. Shelter/housing inflation rose 0.2% and was the primary factor in the increase in inflation. Energy prices rose 0.9% as the gasoline index rose 1.0% over the month, although the energy index decreased 0.8% on an annualized basis. Food prices also contributed to the uptick, rising 0.3%. The readings reinforce comments out of the Fed that prices would increase into the summer; attention now turns to Wednesday’s PPI inflation report for further clues into how tariffs have impacted prices in the US. A key risk to the economy is the impact inflation will have on consumer spending and the extent to which firms will pass on tariffs to consumers. If firms and companies cannot absorb the tariff costs and pass them onto consumers, that could be a significant factor in driving an economic slowdown.

Treasury Secretary Scott Bessent said that the Treasury does not plan to increase the auction sizes of the longer-dated debt at current interest rates, which could provide support for longer-term debt prices. That will leave the Treasury more dependent on short-term Treasury bill issuance to finance its operations. The Treasury is expected to ramp up net T-bill issuance in order to replenish its cash balance closer to $850 billion by the end of the quarter. More than $1 trillion in short-term T-bills are expected to hit the market over the next one and a half years following the increase of the debt ceiling. However, money market funds will remain steadfast buyers, providing ample demand for the short-term debt. Money market funds have a record $7.4 trillion in assets as of July 1 and plan to take on more supply. Estimates of new Treasury issuance over the next 18 months are between $900 billion and $1.6 trillion, higher than initial projections before the debt ceiling was raised.

Economic adviser Kevin Hassett remarked that President Trump “can fire” Fed Chair Jerome Powell “if there’s cause,” stirring fresh speculation around the central bank’s independence. Meanwhile, US Treasury Secretary Scott Bessent, in an interview on Tuesday, said that a “formal process” is already starting to identify a potential successor to Federal Reserve Chairman Jerome Powell.

The 10-year Treasury yield is 4.42%, and the 30-year yield is 4.95%. The spread between the two- and 10-year yields rose to 50 bps from 48 bps this time yesterday.

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