West Texas Intermediate crude futures jumped to nearly $80 a barrel from $67 earlier this month, fueling fresh concerns about inflation.
Focus on the testimonies of CPI and Warsh
Investors will get a new reading on price pressures on Tuesday when the Labor Department releases the June Consumer Price Index at 8:30 a.m. ET.
Economists surveyed by Bloomberg forecast that the headline CPI will fall below an annual rate of 4%. The report is expected to show the first declines in headline and core inflation since January, following May’s figures of 4.2% and 2.9%, respectively.
Even if the figures meet expectations, they risk being considered retrospective given the recent surge in oil prices. If inflation turns out to be rather persistent, the data could amplify concerns about the Fed’s path forward.
Attention will then turn to Mr. Warsh’s testimony at the Capitol. Given the Fed Chairman’s preference for limited forward guidance, investors will closely monitor any signals regarding rates and inflation.
According to ING analysts, he could “if he wishes, emphasize the moderation of inflation expectations”.
They added that Mr. Warsh “has enough ammunition here to face the risk of rising rates and instead hold on. Even if he is under pressure to raise rates, the wealth attached to the 5-year end of the curve tells us that any hike (if it happens) is likely to be subsequently reversed, with the prospect always of greater cuts than hikes.”
