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Why tonight’s inflation report could shake global markets to their core
July Consumer Price Index (CPI) data is a critical indicator of inflationary trends that could shape monetary policy and asset prices worldwide. The muted global risk sentiment reflects a cautious stance among investors, driven by uncertainty surrounding the inflation report and its implications for Federal Reserve policy.
Meanwhile, President Donald Trump’s executive order extending the China tariff deadline by 90 days into early November has provided a temporary reprieve, lifting sentiment in Asian markets. However, Wall Street’s cautious retreat from near-record highs, coupled with developments in cryptocurrencies like Ethereum and Bitcoin, underscores the intricate interplay of macroeconomic data, trade policies, and speculative assets in shaping market dynamics.
The US July CPI report, due tonight, is a focal point for markets, as it will provide insight into whether inflationary pressures are intensifying or moderating. Economists project a year-over-year headline inflation increase of 2.8 per cent, up 10 basis points from June’s 2.7 per cent, with core CPI, which excludes volatile food and energy prices, expected to rise 0.3 per cent month-over-month and 3.0 per cent annually. These figures are critical because they could influence the Federal Reserve’s decision on interest rates at its September meeting.
A softer-than-expected CPI reading could bolster expectations for a 25-basis-point rate cut, signalling that the Fed views inflation as manageable and is prioritising economic growth amid signs of a slowing labour market. Conversely, a higher-than-expected figure could dampen hopes for immediate rate cuts, as persistent inflation driven by tariffs and supply chain pressures might force the Fed to maintain its current stance. This uncertainty has kept investors on edge, contributing to a cautious tone in global markets.
The recent executive order from President Trump extending the China tariff deadline by 90 days has introduced a layer of optimism, particularly in Asian equity markets. The decision, while light on specifics, signals a temporary de-escalation in US-China trade tensions, which have been a significant driver of market volatility in 2025.
Asian equity indices opened higher this morning, reflecting relief that the immediate threat of escalated tariffs has been deferred. This extension aligns with earlier trade agreements, such as the May 12 deal that paused additional tariffs and set US tariffs on Chinese imports at 30 per cent, while China lowered its tariffs on US goods to 10 per cent.
However, the fluid nature of trade policy under the Trump administration keeps markets wary. A social media post from the White House on May 30 suggested that China may have violated the agreement, raising the specter of renewed tariffs. Such unpredictability underscores the fragility of the current truce and its potential to disrupt global trade and inflation dynamics.
Wall Street’s reaction to these developments has been subdued, with major indices like the S&P 500, NASDAQ, and Dow Jones retreating slightly from near-record levels, declining by 0.3 per cent, 0.3 per cent, and 0.5 per cent, respectively. This pullback reflects investor caution ahead of the CPI data, as a higher-than-expected inflation reading could pressure risk assets, including equities and cryptocurrencies.
US treasury futures have shown limited volatility, with yields remaining rangebound, indicating that bond markets are also in a wait-and-see mode. The US Dollar Index, up 0.3 per cent, has benefited from this cautious sentiment, as investors seek safe-haven assets amid uncertainty. Gold, however, retreated 1.4 per cent to US$3,351 per ounce after Trump clarified that bullion imports would be exempt from tariffs, reducing its appeal as a hedge against trade-related inflation.
In the commodity markets, Brent crude oil edged up 0.1 per cent, consolidating at higher levels despite a lack of significant news flow. The oil market’s stability reflects a balance between demand concerns and supply dynamics, with OPEC+ reportedly considering a larger-than-expected production hike.
This development could cap upside potential for oil prices, particularly if trade tensions resurface and dampen global demand. The interplay between tariffs, inflation, and commodity prices remains a critical factor for investors, as higher input costs could further fuel inflationary pressures, complicating the Federal Reserve’s policy calculus.
The cryptocurrency market, meanwhile, has emerged as a bright spot amid the broader caution. Ethereum has outperformed Bitcoin in year-to-date gains, rising 29 per cent to US$4,311.58 compared to Bitcoin’s 28 per cent increase to US$120,020.83. Ethereum’s surge past the US$4,000 mark, a level not seen since December 2024, reflects growing institutional demand and inflows into US spot Ethereum exchange-traded funds (ETFs).
These funds have attracted US$5 billion in net inflows over the past month, with total assets under management reaching US$20 billion since their launch in July 2024. Digital asset treasury companies (DATs) are also stockpiling ETH, emulating the strategy pioneered by Bitcoin advocate Michael Saylor. This institutional buying has bolstered Ethereum’s price, despite a 0.9 per cent daily decline, and highlights the increasing integration of cryptocurrencies into mainstream finance.
Bitcoin, while slightly trailing Ethereum in year-to-date performance, has also seen significant gains, climbing above US$122,000 over the weekend. The total cryptocurrency market capitalisation has surged to US$4.1 trillion, reflecting renewed investor enthusiasm. The correlation between Bitcoin and US equity markets has strengthened since mid-July, suggesting that cryptocurrencies are increasingly viewed as risk assets sensitive to macroeconomic developments.
Options market activity underscores this dynamic, with Bitcoin options open interest at US$43 billion and Ethereum at US$13.9 billion, approaching record highs. Traders are positioning for volatility around the CPI release, with elevated open interest indicating both hedging against downside risks and bets on further upside momentum. Short-call covering in Bitcoin options suggests reduced bearish sentiment, but implied volatility is expected to remain high until the CPI data provides clarity.
From my perspective, the current market environment reflects a delicate balance between optimism and caution. The extension of the China tariff deadline offers a reprieve, but the lack of clarity on trade policy keeps investors on edge. The CPI report will be a pivotal moment, as it could either reinforce expectations for a dovish Federal Reserve or signal persistent inflationary pressures that delay rate cuts.
The resilience of cryptocurrencies like Ethereum and Bitcoin, driven by institutional adoption and ETF inflows, highlights their growing role as alternative assets in a volatile macroeconomic landscape. However, their correlation with equities suggests that a negative surprise in the CPI data could trigger a broader sell-off in risk assets.
The Federal Reserve faces a challenging path. Two Fed governors, Michelle Bowman and Christopher Waller, dissented in the last meeting, advocating for rate cuts due to signs of a slowing labor market and their belief that tariff-driven inflation may be transitory.
However, Fed Chair Jerome Powell has emphasised a data-dependent approach, and a higher-than-expected CPI reading could strengthen the case for holding rates steady. The labor market, while still robust, shows signs of softening, with recent revisions slashing job growth figures for May and June to 19,000 and 14,000, respectively. These figures, the lowest two-month job growth since April 2021, add pressure on the Fed to balance its dual mandate of price stability and maximum employment.
Asian markets’ positive response to the tariff deadline extension underscores the global sensitivity to US trade policy. However, the risk of retaliation from trading partners, such as the EU’s potential €95 billion countermeasures, looms large.
Tariffs have already driven price increases in categories like furniture, auto parts, and electronics, contributing to inflation expectations of 4.4 per cent in the coming year, according to the University of Michigan’s consumer sentiment survey. Despite these concerns, consumer sentiment improved in July to 61.8, reflecting resilience in the face of tariff threats and robust retail sales data.
In conclusion, the US CPI report serves as a critical catalyst. The interplay of trade policy, inflation, and monetary policy will shape market sentiment in the coming weeks. Cryptocurrencies, particularly Ethereum, are carving out a significant role in this environment, driven by institutional demand and speculative interest.
However, the risks of higher inflation and renewed trade tensions could disrupt the current rally in risk assets. Investors should remain vigilant, balancing opportunities in equities and digital assets with the need to hedge against potential volatility. The next few days will be crucial in determining whether the current cautious optimism gives way to renewed confidence or a retreat into risk-off sentiment.
Source: https://e27.co/why-tonights-inflation-report-could-shake-global-markets-to-their-core-20250812/
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