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Key Takeaways
While inflation cooled last month, we’ve seen oil prices surge to $90 USD/barrel this week – the highest point since the start of June.
US economic policy makers meet next week; this will mark the second public appearance of new Fed Chair Kevin Warsh.
Chart of the week: Probabilities of outcomes for the July 2026 Fed meeting.
The first fall in annual US inflation in five months could have settled the interest rates debate. But instead, the odds of a hike at next week's Fed meeting have roughly tripled since last week.
It might have something to do with the price of oil has jumped again, following tensions escalating between the US and Iran. This brings an unwanted possibility into potential reality – a round two of oil moving back above $100 USD a barrel.
The timing of this move matters, as we head into the next key update from the Federal Open Markets Committee (FOMC) next week, with their update homing in on interest rates as well as anything else that could impact inflation and growth.
Right now, two things are true at the same time – and they're pulling in opposite directions. Inflation genuinely cooled last month, yet oil is re-accelerating this month. And Bitcoin, Ethereum and XRP won't necessarily react to either outcome in the same way.
Let's dig in.
Are hikes back on the table?
Here's the way to hold both halves of this story in your head at once. Last month's headline inflation data showed a cooling, CPI fell 0.4% in June, taking the annual rate to 3.5%. This half of the story is what we know. This is the first time in five months the headline CPI year-on-year figure was falling lower.
But what could threaten this shift? Well as I have mentioned in previous Squawks, the price of energy is a larger weighted component of the inflation calculation.
And right now, the concern is that we could see geopolitical tensions and the Strait of Hormuz continue to be a difficult situation for the market to navigate, especially as we have no insight into how long this could go on for.
In general, the idea that a resolution (that sticks) is good for oil and energy prices coming down will help inflation hold lower. And unfortunately, the opposite of this is true as well.
And this might be why the market’s view on interest rates is shifting.
Chart of the week: Probabilities of the July 2026 Fed meeting
Kevin Warsh made it clear in his first address as Fed Chairman that the committee’s firm belief is inflation needs to, eventually, hit its 2% target.
Interest rates are one of the tools which policy makers can tinker with to reach this desired result.
Right now, the market is has shifted from an 11.8% view that rates could increase in this month’s meeting, to a now 33.7% probability.
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And that’s my takeaway for this week’s Squawk. The market can only make decisions on what it knows. And what it knew last week was that inflation cooled, but it was only a single month move lower – so we are yet to see a longer-term trend of it coming down. And since then, oil prices globally have moved incrementally closer to triple figures. Of the two oil benchmarks, WTI has advanced to around $90 USD while Brent, which trades at its own premium, pushed to $98.44 overnight.
The way I see it, this could turn into a real test for the market – and volatility could be rife.
As I said before, the market can only work with what it knows. So what if we see policy makers take measures to combat re-inflation? What if they do raise interest rates?
That may eventuate as a headwind for crypto assets going higher.
And to throw it out there, what if policy makers acknowledge and dismiss the impact of energy costs, and everything stays the same? Maybe then we continue to see price stability in Bitcoin and the broader market.
Each is possible, and each will take us on a different ride ahead. Which are you leaning towards?
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