According to a recent research report, the escalation of tensions in the Middle East has led to a rebound in oil prices, while the Federal Reserve's stance has turned more hawkish, though internal divisions remain significant. If subsequent inflation pressures decline as expected and the July FOMC meeting does not release more hawkish signals, there is potential for a further cooling of rate hike concerns. It is anticipated that a gradual easing of liquidity pressures will commence from mid-to-late July, marking a transition from a 'Black June' to a 'Reversal July'. The key points from the analysis are outlined below.
Geopolitical Tensions and Fed Policy Stance
Following a series of vessel attacks in the Strait of Hormuz, the US-Iran conflict has escalated again, with Iran once more closing the strategic waterway. The pattern of conflict interspersed with negotiations and repeated fluctuations in the situation is likely to persist. The minutes from the June Federal Reserve meeting indicated that some officials see a possibility for further rate hikes, revealing substantial internal disagreement and a strengthening of hawkish views. The announcement of the special task force leadership by the Fed on July 9 featured a high-profile lineup, with research results potentially submitted by year-end, but short-term guidance on monetary policy direction remains unclear. Given the Fed's hawkish tilt amid significant internal dissent and ambiguous signals, market focus on economic data is expected to intensify. Should inflation pressures recede as anticipated without additional hawkish cues from the July FOMC meeting, concerns over further rate hikes could diminish, paving the way for a moderation in liquidity pressures from mid-to-late July.
Global Asset Performance: Oil Prices Rise on Conflict
The renewed flare-up in US-Iran tensions has driven a recovery in crude oil prices. IPE Brent crude futures rose 4.6% to $75.2 per barrel, with prices briefly rebounding to $80 per barrel on July 8. COMEX copper gained 1.8%, while spot gold prices in London experienced volatile declines. Global equity markets across major economies showed mixed performance. The Hang Seng Index posted a notable rebound, rising 3.5%. The S&P 500 increased by 1.2%, the Nikkei 225 fell 1.7%, and the Shanghai Composite Index declined 1.2%. The yield on the 10-year US Treasury note rose by 7 basis points to 4.56%, primarily driven by an increase in real interest rates. The US dollar index fluctuated around 101, the Renminbi exchange rate remained relatively stable, and the USD/JPY rate hovered near the 161 level.
US Economic Resilience
The US ISM Services PMI for June declined but remained at a relatively high level, indicating ongoing resilience in the services sector. Regarding the labor market, initial jobless claims stayed low, and while continuing claims saw a slight uptick, they remained broadly stable, suggesting a relatively low near-term risk of a significant slowdown in the US job market. Key data releases to watch next week include US CPI on July 14 and PPI on July 15.
Risk Factors
Potential risks include continued volatility in US-Iran relations and a more hawkish-than-expected shift in Federal Reserve monetary policy.
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