Middle East conflict reverberated across markets late in the week putting equities under pressure. The US dollar lifted following Israel's strikes on Iran, suggesting the dollar retains some of its safe-haven status, but it still fell over the week as pricing for further Fed rate cuts was bolstered by soft inflation figures for May. Lower Treasury yields likely also played a role. In light of deficit concerns and policy uncertainty, this week's Treasury auctions drew significant focus. In the event, the auctions generally went better than feared, indicating strong investor demand is still there. That confidence was a factor in Treasury yields falling this week.
US inflation data that showed no discernible tariff-related impacts restored rates pricing for two further rate cuts from the Fed by year-end. Consumer and producer price data underwhelmed expectations this week, with markets expecting the core PCE deflator - the key gauge for Fed policy - to come in at 0.1%m/m and 2.6%yr in May, outcomes seen keeping rate cuts in play. At next week's meeting, the Fed seems likely to remain non-committal. The message from Chair Powell last time was that the pass-through from tariffs to prices is uncertain; the impact could be short-lived, but it could also result in something more persistent. The data has yet to provide a steer. CPI printed at 0.1% month-on-month on both a headline and core basis, cooler than the 0.2% and 0.3% outcomes expected respectively. Annual inflation ticked up from 2.3% to 2.4% headline and the core rate held at 2.8%. Producer prices lifted by just 0.1% month-on-month (vs 0.2%), with the annual rate rising as forecast to 2.6%yr.
A range of soft data points out of the UK indicates the Bank of England's easing cycle has further to run. Monthly GDP figures reported a decline of 0.3% in output in April. This implies a weak start to Q2, though GDP in Q1 was bolstered by tariff front running as US export orders were brought forward. Labour market data was of more concern. Payrolled employment showed its weakest outcome (-109k) since the Covid period, though these reports have been subject to large revisions so the picture may not end up being as downbeat. Wage growth cooled easing to a 5.2%yr pace in May, down from 5.5%.
In Australia, consumer sentiment showed a slight uptick rising by 0.5% in June; however, it still remains in a range defined as pessimistic according to the Westpac-Melbourne Institute's gauge. Sentiment has been pessimistic since 2022 due mainly to cost-of-living pressures. In May, business conditions tracked in the NAB survey fell to a 4½-year low. Counterintuitively, the confidence measure picked up but remains soft.
