Al-Watani: US inflation falls to 3.5%

The National Bank of Kuwait report indicated that global markets moved last week under the influence of two conflicting factors. On one hand, US data showed the strongest signal of inflation receding in over a year. On the other hand, the resumption of US strikes on Iranian targets and the sharp repricing of valuations for AI-linked technology companies added further pressure to investor sentiment.

The report noted that the US Consumer Price Index (CPI) for June fell by 0.4% on a monthly basis, marking the largest monthly decline since April 2020. This brought the overall inflation rate down to 3.5% year-on-year from 4.2%, while the core CPI remained unchanged on a monthly basis, declining to 2.6% year-on-year. Producer prices mirrored this trend, falling by 0.3% on a monthly basis.

The report also covered Federal Reserve Chair Jerome Powell’s first semiannual monetary policy testimony before Congress as the 17th Chair of the Federal Reserve. Speaking before the House of Representatives last Tuesday and the Senate Banking Committee last Wednesday, Powell cautioned against overinterpreting the June CPI decline, warning that “some may look at this morning’s data and say: the job is done.” He pledged to make the inflation surge witnessed over the past five years “a thing of the past,” describing it as a “tax on the American people and businesses.”

With the target range for the federal funds rate maintained at 3.50%-3.75%, Powell reiterated that most officials still see justification for raising interest rates at least once before the end of the year. He also criticized the flexible average inflation targeting framework adopted in 2020, calling it a “mistake,” and announced the formation of five working groups to review communications, balance sheet management, data usage, productivity and employment, and the target inflation level, as part of a broader “system change” in Federal Reserve operations.

The report noted that swap markets continued to price in approximately one interest rate hike of 25 basis points before the end of the year, with the September meeting considered a likely timing for this move.

The report recorded a drop in initial jobless claims to 208,000, underscoring the resilience of the labor market. Meanwhile, retail sales slowed by 0.2% on a monthly basis, with sales excluding automobiles also declining by 0.2%, marking the first drop in over a year.

The report stated that global equities experienced a correction led by semiconductor stocks. The Nasdaq index posted weaker performance following declines in Micron and TSMC shares due to concerns related to AI spending. Meanwhile, the S&P 500 index remained close to its record levels at 7,534 points. Commodities remained hostage to geopolitical developments, with Brent crude trading at $85.40, West Texas Intermediate (WTI) crude at $80.30, and spot gold contracts reaching $3,970. The resumption of confrontations kept the supply risk premium in place, despite uninterrupted actual flows through the Strait of Hormuz.