ATFX: U.S. June CPI Plummets, Kevin Warsh Vows Zero Tolerance for Inflation

ATFX: Federal Reserve Chairman Kevin Warsh stated at yesterday's House of Representatives hearing: "Members of our committee have a resolute commitment to zero tolerance for persistently high inflation." Before Warsh's speech, the U.S. Bureau of Labor Statistics released the June CPI data, with the annual rate dropping from 4.2% to 3.5%, below market expectations; the core annual rate fell from 2.9% to 2.6%, also below expectations. The unexpectedly low CPI data impacted the U.S. Dollar Index, while gold, silver, and U.S. stocks surged. Although Warsh's speech was hawkish, it failed to effectively boost market confidence, and the U.S. Dollar Index fell below the key 101.00 level.

Figure 1, Summary of the movements of Gold, EURUSD, and NAS100 index after the release of CPI data - ATFX

Kevin Warsh's speech lasted about three hours. Although the overall tone was hawkish, the lengthy speech diverted market attention, causing the correlation between market movements and the speech to gradually weaken. For the Federal Reserve's long-term policy adjustments, Warsh's speech is highly instructive.

Kevin Warsh stated: The Federal Reserve will seek to engage in in-depth discussions and reduce the frequency of issuing statements; he did not imply that "the Fed will not expand its balance sheet during crisis periods"; and cautioned against complacency with a "mission accomplished" attitude just because the CPI recorded its first decline in six years that day. From the above remarks, it can be seen that Warsh remains firmly committed to his principle of "reducing the Fed's forward guidance," discouraging Fed officials from giving too many interviews or signaling interest rate adjustments. Warsh is also trying hard to avoid being "labeled" by market participants, such as being seen as Trump's "agent" in the past and now being perceived as "firmly committed to reducing the balance sheet," etc.

Figure 2, List of U.S. Treasury yields across different maturities - ATFX

Although the volatility in the gold, silver, and U.S. stock markets is eye-catching, the core driver of these market changes is interest rate expectations. The 4W U.S. Treasury yield is 3.71%, less than the 8W Treasury yield of 3.73%, a difference of 0.02 percentage points, indicating a low probability of a rate hike. The 4W U.S. Treasury yield is 0.11 percentage points less than the 3M Treasury yield, suggesting increased rate hike expectations but still a low probability. The 4W U.S. Treasury yield is 0.22 percentage points less than the 6M U.S. Treasury yield, close to the magnitude of a single 25-basis-point rate adjustment, indicating a higher probability of a rate hike. Based on this, regardless of how the U.S. CPI data changes or what Kevin Warsh says, the Federal Reserve is highly likely to raise rates once in the second half of the year (especially at year-end).

Before the next CPI data release, the market's expectation of reduced high inflation risk in the U.S. will continue to dominate market trends. The U.S. Dollar Index may face pressure, while gold, silver, non-U.S. currencies, and U.S. stock markets may receive a boost. In the short term, close attention must be paid to the geopolitical situation in the Middle East. If the Strait of Hormuz cannot reopen for a long time and neither the U.S. nor Iran compromises or backs down, a new round of energy shock may be inevitable, and CPI data in the following months may rise again.

ATFX Risk Warning, Disclaimer, Special Statement: The market carries risks, and investment requires caution. The above content represents only the analyst's personal views and does not constitute any operational advice. Do not treat this report as the sole reference. At different times, the analyst's views may change, and updates will not be notified separately.