+965 2224 8361
Daily Economic Update
16.07.2025US: June core CPI inflation lower than expected but tariffs starting to have an impact on consumer prices. CPI inflation in June edged up for the second straight month, to 2.7% y/y (2.4% in May), but in line with expectations. Core inflation came in lower than expected for the fifth straight month standing at 0.2% m/m, which pushed the y/y up to 2.9% from 2.8%. Despite core inflation being lower than expected, tariffs are starting to have an impact on consumer prices. For example, some consumer goods witnessed relatively sharp monthly increases such as appliances (+1.9% m/m), toys (1.8%), household furnishings (1%), and footwear (0.7%). Shelter inflation (0.2% m/m, 3.8% y/y), although continued to soften, remains a key driver of overall inflation. Excluding shelter, headline and core inflation would drop to 2% and 2.2% y/y, respectively, in line with the Fed’s 2% inflation target, but a pick-up from 1.5% and 1.9%, respectively, in May. While the futures market is still reflecting two rate cuts before year-end, the probability of that decreased following the release of June’s inflation data. With tariffs starting to have an impact, y/y inflation rates already above target, the Fed’s own forecast showing a worsening of inflation going forward, it is difficult to see how the Fed will cut rates two times this year if the labor market remains broadly resilient as it is now. The markets ended the day in the red yesterday with the yield curve higher across the board (10-year yield touching 4.5% and the 30-year yield 5%) and the S&P500 down 0.4%.
US: President Trump threatens pharma and semi-conductor tariffs as of August 1, announces trade agreement with Indonesia. President Trump doubled down on re-igniting his tariff escalation mentioning that duties on pharmaceutical imports will likely commence on August 1, starting with a “low tariff”, giving some time for pharma companies to move production to the US before imposing a “very high” tariff after a year or so. Previously, he had mentioned that the pharma tariff can be as high as 200%. In addition, he said that tariffs on semiconductors might follow a similar timeline as the pharma ones. The August 1 date is now becoming a critical date where all country-specific tariffs, copper tariffs, and now likely pharma and semi-conductor tariffs will go into effect. In our view, this slightly increases the chances of a policy reversal before then. Separately, Trump announced reaching a trade agreement with Indonesia, which is among the US’s top-20 trading partners, accounting for 0.9% of total US merchandise imports in 5M2025. While details are still lacking, it was mentioned that the tariff rate on imports from Indonesia will be 19% (compared with 32% in the letter sent to it last week) while there will be zero tariffs on US imports into Indonesia, and whereby Indonesia committed to purchasing from the US the value of $15 billion in energy products, $4.5 billion in agricultural products, and 50 Boeing airplanes.
US: Federal Reserve to face its most challenging time after Powell’s term ends in May 2026. President Trump has, repeatedly, sharply criticized Fed Chair Powell for not lowering interest rates. Trump has even volunteered to specify the level of cuts needed or the level at which the federal funds rate ought to be. These attacks by Trump are unprecedented in US history, and, more importantly highly damaging for the US economy and financial markets, not to mention the independence of the Fed. That independence is a key pre-requisite for a properly functioning US economy and a bedrock for the sanity of the US financial markets. Trump is demanding that Powell cut interest rates to, maybe among other goals, lower the government’s interest payments. While obviously the Fed does not have a mandate to lower the government’s interest payments, this is by no means guaranteed even if the Fed were to cut interest rates. The bond market, if not convinced that interest rates should be lower or even as an objection to the encroachment of the Fed’s independence given the enormous risks of such a matter, can very well push the US treasury yield curve higher, even with the federal funds rate moving lower. As an example, when the Fed cut rates by 100 bps between 18 September and 18 December of last year, the entire US yield curve beyond six-month maturity moved higher, with the average increase for yields on all three-year to 10-year paper standing at close to 100 bps. However, the real risk is not here, but in more fundamental issues. It is certain that the new Chair that will be appointed by Trump (Powell’s term as Chair ends in May 2026) will be expected (if not even pre-committing to Trump) to cut rates. Hence, if the FOMC decides wrongly or even correctly to cut rates at that time, the market is going to look at that with an economic as well as a political angle, undermining the Fed’s credibility. In fact, it can be argued that the time after Powell’s term ends and until Trump leaves office in January 2029 would be the most challenging and risky time for the FOMC as it is difficult to see how the market will be convinced that the FOMC decisions are purely based on the incoming economic data and the outlook. Both the independence and credibility of the Fed will possibly be compromised during that period, unless Trump restrains himself. Another important matter is that the incoming Chair would still have to convince his colleagues in the FOMC to cut rates. Traditionally, Fed Chairmen have governed “from the middle” and have had a very good track record in building consensus and keeping dissent at a minimum, just like Powell did. Given the FOMC members’ current views on interest rates, as reflected in the recent unanimous votes, a Trump loyalist as Chair may find it more difficult than usual to build that consensus, which will weaken the Chair position and undermine the Fed.
Japan: Government bond yields surge amid political uncertainty and fiscal concerns. The government bond market is facing mounting pressure as the 10-year yield reached almost 1.6% in intra-day trading yesterday, its highest level since 2008, reflecting deepening investor unease over fiscal sustainability and political instability ahead of a pivotal upper house election. Long term JGBs rose sharply in recent days — with 30 and 40-year yields reaching 3.08% and 3.4%, respectively — as investor sentiment soured amid rising concerns about pre-election tax-cut pledges and deteriorating debt dynamics. Moreover, the BoJ’s pledge to decrease its bond purchases in the future could continue pressuring the authorities to introduce new stabilization measures if yields continue to climb. Rising bond yields, especially the benchmark 10-year one, could have a negative impact on credit demand as the ten-year yield is closely linked to household mortgages and corporate borrowing. Rising investor concern about Japan’s fiscal sustainability cautions that a delay in fiscal clarity or continued political turbulence may prolong market volatility, with significant repercussions for Japan’s economic outlook.
Oil: OPEC maintains near-term supply and demand growth projections. In its monthly oil market report, OPEC kept its oil demand growth forecasts for this year and next at 1.3 mb/d, with non-OECD economies accounting for 1.2 mb/d in both years. The agency’s forecast for non-DoC supply growth was also unchanged at 810 kb/d for 2025 and 730 kb/d. Monthly production figures for June show DoC (OPEC+ including Mexico) production rising by 349 kb/d m/m to 41.56 mb/d with Saudi Arabia, UAE, Kazakhstan, and Russia all leading growth while production fell the most in Iran likely due to the Iran-Israeli conflict that took place mid-month. In an unusual move, Saudi Arabia reported both its “supply-to-market” and production figures for the month, with the former showing compliance with the OPEC-quota while the latter (actual production) exceeded it by near 400 kb/d. The numbers confirm what the IEA reported last week on increased Saudi production, to which the Kingdom issued a statement saying that output was higher due to contingency measures and the additional volumes were not marketed domestically or internationally but were instead redirected to build domestic inventories and to position barrels to offshore storage hubs. However, high frequency data shows that Saudi crude exports and refinery runs were indeed higher in June and stockpiles grew, showing real production gains. Taking Saudi’s “supply-to-market” in lieu of production at face value, OPEC-8 output grew by 394 kb/d m/m, slightly below the 411 kb/d production ceiling hike for the month with both Russia and Iraq now in compliance with both OPEC-mandated quota and the compensatory cuts. Meanwhile, Kazakhstan’s oil output rose by 64 kb/d m/m to 1.85 mb/d, putting it near 350 kb/d over its quota, though the country states it has no intention of leaving the OPEC+ alliance.
Saudi Arabia: Inflation edges up in June despite less pressure from housing. Consumer price inflation edged up to 2.3% y/y in June from 2.2% the previous month, in line with market expectations. Inflation has remained contained at or below 2.3% since February thanks to softer housing inflation which eased to 6.5% in June from 6.8% in May, mostly on a decline in rent inflation. The authorities have taken several recent measures to curb housing inflation by boosting supply. This includes the introduction of a vacant property tax and higher/broader fees on white lands. Contributing to the inflation uptick was a faster increase in tobacco prices (0.5% y/y from 0.3%), and slower deflation in items including clothing (-0.6% from -0.9%), furnishings, (-1.7% from -2.5%), and communication (-1.2% from -1.4%). Core inflation (excluding food and energy) came in at 2.6% y/y, slightly above the 2.5% in May. We expect to see further normalization of price dynamics in coming months, as housing inflation continues to drift lower and deflation continues to ease in most other categories. Looking back at the first half of the year, inflation averaged 2.2% y/y, matching our forecast for the full year.