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London Quick Take - 15 July - Light US CPI lifts sentiment, semis rally and ASML raises guidance, oil tests 1-month highs as US hits Iran again
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Clearly the softening in the inflation data in June has seen markets dial back July rate hike expectations as it suggests the Fed is not going to be in a rush to tighten, but we are still assessing the reaction function of the Fed under Warsh (there is no forward guidance) and I believe the meeting remains ‘live’. There remains a risk the market is under-pricing the Fed’s shift to a forward-looking adaptive/proactive approach from a data-dependent and backward-looking reactive approach favoured under past chairs.
All three major equity indices in the US rallied as inflation came in light, with the S&P 500 up +0.4% and Nasdaq Composite +0.9%, while the Dow eked out a tiny gain as IBM plunged 25% as it warned Q2 profits would be lower than expected. Semis were higher led by a +4% gain for Nvidia and the broader market enjoyed a bounce from positive bank earnings, even as the share price reaction was choppy. NDX rallied +1.1% to recapture its 50-day moving average. The rally in semis in the US lifted tech in Asia overnight with the Kospi +6% higher with a gain of more than +8% for SK Hynix.
Bank earnings were knockout; JPM said every major business posted record revenue, earnings were up +41% and investment banking fees up +30%. Bank of America and Wells Fargo also beat on the top and bottom lines. Goldman Sachs numbers were exceptional - earnings of $20.98 per share, about a third above the $14.48 expected, while revenue of $20.34 billion easily beat the $16.13 billion consensus estimate. Citi earnings rose 45% on investment banking and trading strength but the stock tumbled –5%. IBM tumbled after missing expectations, citing weakness in software and infrastructure businesses. The CEO said the company had not anticipated a reprioritization in capex as customers shifted more to AI infrastructure - servers, storage and memory - ahead of expected price increases. Software stocks like ServiceNow, Salesforce, Adobe and others fell in response to the soft numbers, while semis and memory stocks rose. This morning there was another boost for this trade as Dutch semiconductor equipment maker ASML raised its 2026 guidance for a second time.
Tl/dr: Cooler-than-expected US inflation reading spurred stocks and bonds, even as higher oil prices raises the prospect of higher-for-longer inflation and rates.
Bond yields spiked on worries about the Strait of Hormuz but the US inflation report came in softer than expected to see the moves reverse and markets trimmed their bets for rate hikes a tad, pushing stocks higher. After a mildly positive session on Tuesday, European shares are lower early Wednesday by around 0.5-1% with the US launching fresh strikes on Iran. Crude is a bit firmer with Brent +1.5% this morning though oil prices are trading a range and not taken out yesterday’s one-month high after Trump rowed back threats to impose 20% tolls on ships transiting the Strait; classic TACO Tuesday I guess. Chinese growth slowed more than expected in the second quarter, down to +4.3%, the weakest in three years, which has weighed on miners this morning. Yields are flat and gold is barely changed a little above $4k/oz.
US CPI inflation was softer than expected, with headline inflation down to +3.5% in June from the three-year high +4.2% in May. Core was flat on the month and +2.6% on a yearly basis, compared to the +2.9% increase in May. The probability of a rate hike at the Fed’s July meeting fell to 17% from 42% a day earlier on the report.
But the CPI is not mission accomplished, according to Fed chair Kevin Warsh, who is bearing down on inflation...he says it will be a thing of the past if they get monetary policy right. I feel like that’s one of those end-of-boom-and-bust type remarks that is bound to come back and bite him...and what is the ‘correct’ policy? Nevertheless, rates have a Warsh Fed credibility premium/dividend, whatever you want to call it. Warsh reiterated that the Fed has “no tolerance for persistently elevated inflation”... is this the Mario Draghi ‘whatever it takes’ approach or does it mean July is still live? Warsh was particularly critical of the past regime and suggested current inflation was more deeply embedded. “The longer that prices have been above the inflation target, it's usually a bit harder to dislodge them and get them lower. Our job, my commitment to you is to take sticky prices and to unstick them,” he told policymakers. The question for the market is whether he plans to jawbone them down by sounding tough ("no tolerance") or act decisively.
Bond yields spiked on worries about the Strait of Hormuz but the US inflation report came in softer than expected to see the moves reverse and markets trimmed their bets for rate hikes a tad, pushing stocks higher. After a mildly positive session on Tuesday, European shares are lower early Wednesday by around 0.5-1% with the US launching fresh strikes on Iran. Crude is a bit firmer with Brent +1.5% this morning though oil prices are trading a range and not taken out yesterday’s one-month high after Trump rowed back threats to impose 20% tolls on ships transiting the Strait; classic TACO Tuesday I guess. Chinese growth slowed more than expected in the second quarter, down to +4.3%, the weakest in three years, which has weighed on miners this morning. Yields are flat and gold is barely changed a little above $4k/oz.
US CPI inflation was softer than expected, with headline inflation down to +3.5% in June from the three-year high +4.2% in May. Core was flat on the month and +2.6% on a yearly basis, compared to the +2.9% increase in May. The probability of a rate hike at the Fed’s July meeting fell to 17% from 42% a day earlier on the report.
But the CPI is not mission accomplished, according to Fed chair Kevin Warsh, who is bearing down on inflation...he says it will be a thing of the past if they get monetary policy right. I feel like that’s one of those end-of-boom-and-bust type remarks that is bound to come back and bite him...and what is the ‘correct’ policy? Nevertheless, rates have a Warsh Fed credibility premium/dividend, whatever you want to call it. Warsh reiterated that the Fed has “no tolerance for persistently elevated inflation”... is this the Mario Draghi ‘whatever it takes’ approach or does it mean July is still live? Warsh was particularly critical of the past regime and suggested current inflation was more deeply embedded. “The longer that prices have been above the inflation target, it's usually a bit harder to dislodge them and get them lower. Our job, my commitment to you is to take sticky prices and to unstick them,” he told policymakers. The question for the market is whether he plans to jawbone them down by sounding tough ("no tolerance") or act decisively.
Clearly the softening in the inflation data in June has seen markets dial back July rate hike expectations as it suggests the Fed is not going to be in a rush to tighten, but we are still assessing the reaction function of the Fed under Warsh (there is no forward guidance) and I believe the meeting remains ‘live’. There remains a risk the market is under-pricing the Fed’s shift to a forward-looking adaptive/proactive approach from a data-dependent and backward-looking reactive approach favoured under past chairs.
All three major equity indices in the US rallied as inflation came in light, with the S&P 500 up +0.4% and Nasdaq Composite +0.9%, while the Dow eked out a tiny gain as IBM plunged 25% as it warned Q2 profits would be lower than expected. Semis were higher led by a +4% gain for Nvidia and the broader market enjoyed a bounce from positive bank earnings, even as the share price reaction was choppy. NDX rallied +1.1% to recapture its 50-day moving average. The rally in semis in the US lifted tech in Asia overnight with the Kospi +6% higher with a gain of more than +8% for SK Hynix.
Bank earnings were knockout; JPM said every major business posted record revenue, earnings were up +41% and investment banking fees up +30%. Bank of America and Wells Fargo also beat on the top and bottom lines. Goldman Sachs numbers were exceptional - earnings of $20.98 per share, about a third above the $14.48 expected, while revenue of $20.34 billion easily beat the $16.13 billion consensus estimate. Citi earnings rose 45% on investment banking and trading strength but the stock tumbled –5%. IBM tumbled after missing expectations, citing weakness in software and infrastructure businesses. The CEO said the company had not anticipated a reprioritization in capex as customers shifted more to AI infrastructure - servers, storage and memory - ahead of expected price increases. Software stocks like ServiceNow, Salesforce, Adobe and others fell in response to the soft numbers, while semis and memory stocks rose. This morning there was another boost for this trade as Dutch semiconductor equipment maker ASML raised its 2026 guidance for a second time.
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