WEFC | Match or Candle—It All Burns [PDF Download] | Blog

Inflation can ignite in a flash—or smolder slowly, long before markets notice the heat. Whether sparked by a geopolitical match or the steady flame of persistent price pressures, the result is the same: it all burns.

May’s U.S. CPI offered a brief moment of relief, cooling faster than expected and bolstering hopes for eventual rate cuts. But the respite was short-lived. Oil prices surged anew following Israeli strikes on Iran, reintroducing inflation risks just as global central banks prepare to hold their ground.

This week’s “Super Central Bank Week” brings critical decisions from the Fed, BOJ, and BOE. While no immediate moves are expected, the tone they strike will speak volumes. Policymakers now face a delicate balance: to fan the flames of growth with easing—or hold the line against a reignited inflationary blaze.

In this week's WEFC, we explore the volatile interplay between energy, inflation, and policy—and why, whether it begins with a match or a candle, the fire is far from out.

Match or Candle — It All Burns

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Israel Strikes Iran in Operation ‘Strength of a Lion’; Oil & Gold Spike

Last week, escalating Israel-Iran tensions roiled global markets. WTI and Brent oil prices surged over 10% to yearly highs, while European stocks fell sharply. The S&P 500 dipped only slightly, buoyed by better-than-expected US CPI data. Amid the volatility, safe-haven assets rallied: the US Dollar Index rebounded, and gold prices hit a record $3,500/oz. The Philadelphia Semiconductor Index's rise also provided tech and Asian markets with stability, indicating a clear flight to safety and a focus on resilient sectors as geopolitical risks intensify. This market reaction underscores heightened investor caution.

Trump's Tariffs Secure Rare Earths: A Strategic Shift to Concessions

Donald Trump's announced "done" US-China trade deal, maintaining 55% tariffs on Chinese goods while China applies 10%, signals a strategic pivot. This agreement, pending approval, crucially secures China’s commitment to resume rare earth and magnet exports. China's earlier move to halve rare earth exports was a direct response to US tech curbs, demonstrating its potent mineral leverage. This deal underscores the use of tariffs as a negotiation tool to extract critical resources rather than solely escalate trade conflict. It highlights the indispensable role of rare earths in both US economic and defense sectors.

May CPI's Deception: Tariffs & Oil Signal H2 Inflation Pressure

May's lower-than-expected CPI was primarily driven by significant energy deflation and slowing core services inflation, notably rent. However, this calm masks looming tariff-led price pressures. Businesses extensively stockpiled goods pre-tariff, creating inventory buffers that temporarily shield consumers. Furthermore, limited corporate pricing power has forced firms to absorb initial tariff costs. As these buffers deplete and market dynamics shift, tariff effects are poised to materialize in Q3, potentially pushing inflation higher. Rising oil prices will also exert upward pressure on inflation in the second half of the year.

FOMC, BOJ, BOE: Stable Rates Expected, Future Paths Remain Uncertain

This "Super Central Bank Week" features the Fed, BOJ, and BOE policy meetings. While no rate changes are expected, their forward guidance will be scrutinized. The Fed's updated dot plot is key, likely signaling fewer 2025 rate cuts due to persistent inflation and geopolitical risks. The BOJ will release its new QT plan, while the BOE faces internal divisions amid rising inflation and a softening labor market. Central banks are prioritizing caution as they navigate a complex landscape of economic uncertainty and heightened global risks, shaping market expectations and capital flows.

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