Stock markets in the US and Europe reacted positively to the slowdown in inflation in the US

Most of the decline in inflation in July was due to the drop in gasoline prices, which fell by 7.7% for the month. Other categories also saw significant declines, including prices of airline tickets, used cars and trucks, and clothing. On the other hand, some analysts are inclined to think that markets have overreacted positively to the slowdown in inflation because the Fed is still in a cycle of raising rates and will begin cutting the balance sheet next month. Also, according to a new Bloomberg Economics model, inflation in the US now consists of four factors: supply, demand, energy prices, and monetary policy. This model showed that lower energy costs and a tougher Fed stance were the main factors behind the slowdown to 8.5% last month. At the same time, rising demand combined with supply constraints continued to put upward pressure on inflation.

The US Energy Information Administration reported a second straight week of five million barrels increase in crude oil inventories. But the agency also mentioned that gasoline inventories fell by about five million barrels, which helped offset the bearish sentiment hanging over the market. A lower dollar on the back of slowing inflation led to a rise in oil prices. But there is a vicious circle here that many do not notice. Inflation in the US has slowed due to falling oil and gasoline prices. This caused the dollar index to fall, causing oil prices to rise again. Thus, if the dollar index continues to decline, oil prices will continue to rise, which will have the opposite effect and cause a new acceleration of inflation in the US.

Gold hit a 5-week high on declining US inflation. Gold has an inverse correlation to the dollar index and government bond yields, which fell sharply yesterday after the CPI data. But it should be noted that usually, in a cycle of monetary tightening through higher interest rates, the national currency and government bond yields rise.

Asian markets traded lower yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.65%, Hong Kong’s Hang Seng (HK50) fell by 1.96%, and Australia’s S&P/ASX 200 (AU200) ended the day down by 0.53%.

The Reserve Bank of New Zealand will likely raise its rate by another 50 basis points in August. Nevertheless, the deteriorating economic picture and rapidly falling home prices suggest that investors may see a downward revision to the interest rate trajectory forecast. As the RBNZ is increasingly seen as a test case for other central banks, global markets will be watching closely for any dovish bias from the bank.