Inflation Shows Modest Growth

INTEREST RATE MARKET FUTURES

Futures are higher at the front end and lower at the long end of the curve after CPI inflation data showed that inflation in July was modest, with headline CPI rising 0.2%, down from 0.3% in June. Core CPI (excluding food and energy) rose 0.3%, up from June’s 0.2% and the largest gain in six months, reflecting persistent price pressures in shelter, medical care, recreation, and travel. Food prices were flat, as grocery costs dipped slightly while restaurant prices rose. Energy prices declined, led by a 2.2% drop in gasoline, helping to offset broader inflation.

The modest cooling in headline inflation is encouraging, but core inflation remains sticky, especially in services. The underlying inflation trend with core prices will keep the Fed cautious, increasing the stakes of the August labor report. The Fed is likely to interpret this as progress but not victory. With core services inflation still elevated, the central bank may maintain its restrictive policy stance, reinforcing the higher-for-longer narrative, dependent on labor market conditions. With inflation still above the Fed’s 2% target and core services inflation persistent, long-term yields may stay elevated. Short-term yields could remain anchored by Fed policy, but any signs of further cooling could boost demand for Treasuries, pushing yields lower. Recent US ISM services PMI data showed a significant rise in the prices paid index. The higher costs paid by companies are likely to be passed onto consumers as the year carries on, with inflation expected to pick up in the fall.

Over the weekend, Fed Vice Chair for Supervision Michelle Bowman explained her dissent at the July FOMC meeting. She argued that with slowing economic growth and signs of a weakening labor market, it was appropriate to begin easing the Fed’s moderately restrictive policy toward a neutral stance, suggesting that action in July could have helped mitigate further economic and labor market deterioration. Bowman also expressed optimism about inflation trends, noting that core PCE inflation is likely closer to the Fed’s 2% target than current data reflects, with housing services inflation declining, other core services inflation already aligned with the target, and only core goods inflation remaining elevated—likely due to limited tariff passthrough.

The spread between the two- and 10-year yields rose to 53.7 bps from 50.6 bps on Monday.

STOCK INDEX FUTURES

Stock index futures are higher as markets digest the July CPI inflation report that came in line with expectations. Inflation ticked higher, with core prices rising 3.1% over the past year in July, ahead of June’s 2.9% increase and an indication that rising goods inflation is no longer being offset by easing services inflation. Late Monday, President Trump announced that he nominated E.J. Antoni, chief economist at the conservative Heritage Foundation, to lead the Bureau of Labor Statistics. Investors are now pricing in roughly a 90% chance the Fed will cuts rates in September, up slightly from an 86% chance seen on Monday.

President Trump signed an executive order extending the tariff truce between the US and China for another 90 days, pushing trade negotiations out to the fall. China also announced the extension of the tariff pause on state media. On Tuesday, reports said China urged local firms not to use Nvidia H20 chips, complicating Trump’s bid to turn those sales into a US windfall. Trump also said imports of gold to the US would not face a tariff after a customs agency ruling on Friday that popular gold bars would be subject to new duties.

Weekly jobless claims data and PPI inflation data are due Thursday, followed by retail sales for July and the University of Michigan preliminary consumer survey for August on Friday.

CURRENCY FUTURES

The September USD index is lower following the release of CPI inflation data, which showed that overall inflation is moderating; however, core inflation remains sticky, especially in services like shelter and medical care. Markets bets of a September rate cut from the Fed edged up slightly. Given that inflation came in line with expectations and that core prices remained sticky, the Fed will likely look to the August labor report as a final factor for policy guidance.

Euro futures are higher as the dollar slipped. As new data shows that financial confidence in the Eurozone dropped in August over the European Union’s trade deal with the US and Germany’s weak economic performance in the second quarter of 2025. The ZEW Indicator of Economic Sentiment, which this month tracked the expectations of 182 analysts at banks, insurance companies, and other businesses, dived 18.0 points on the month to 34.7 in Germany for August, while it fell 11 points to 25.1 for the eurozone as a whole. Market attention will turn to Friday’s meeting between President Trump and Putin, aimed at finding a resolution to the war in Ukraine. On the data front, final inflation figures for July are being released from Germany and Spain on Wednesday and from France on Thursday. Eurozone industrial production figures for June are due on Thursday, alongside second-estimate eurozone GDP data for the second quarter.

British pound futures edged higher against the dollar despite payroll data showing that the UK labor market continues to loosen. The number of workers on payroll fell by 26,000 between the months of May and June, while the unemployment rate climbed to 4.7% from 4.5% during that same period. Early estimates showed payrolls fell by another 8,000 in July, a smaller decline but nevertheless marking an eighth monthly fall in the past nine months. Vacancies fell by 5.8% to around 718,000. The data raises concerns that higher labor costs, which have been the result of new payroll taxes, have dented the job market. Average weekly earnings excluding bonuses rose 5.0% on the year in the three months to June, the same rate as in May, remaining at its softest pace in nearly three years. Weekly earnings plus bonuses rose 4.6%, down from 5.0% in May. Private sector wage growth is expected to cool later this year, which could offer the Bank of England an opportunity to lower rates as it helps cool the underlying inflation picture. However, the BoE forecast that annual inflation would peak at 4.0% in September, causing the sterling and gilt yields to rise as investors pared back expectations for another rate reduction in November. Upcoming data, however, could shift concerns from inflation to the economic outlook. Gross domestic product data for the second quarter and June industrial production figures are due on Thursday, which will give markets another look at how the UK economy is weathering.

Japanese yen futures are little changed. Minutes from the Bank of Japan’s July meeting showed that the central bank expected growth to be moderate while also expecting underlying CPI inflation to improve slightly. While a trade deal with the US has helped reduce some uncertainty, BoJ Governor Kazuo Ueda cautiously noted that the economic impact of high tariffs remains unclear, and underlying inflation is still below the 2% target. Markets are awaiting key Japanese data releases for further cues, including Q2 GDP, the Reuters Tankan survey, producer prices, and machine tool orders.

Australian dollar futures are lower after the Reserve Bank of Australia cut interest rates and signaled that further easing was ahead. Underlying inflation in the country has retreated towards 2.1% and is expected to continue to moderate. Labor conditions in the country have eased slightly, with unemployment jumping to 4.3% in June from May, setting the bank up to continue a gradual easing path. The nine-member board of the RBA voted unanimously for the cut, ending a period of division after a split six-to-three vote in July to keep interest rates unchanged. Looking ahead, second-quarter wage growth figures are due on Wednesday and July employment figures on Thursday.

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