Markets Clouded by Middle East Tensions

Equity rally stalls on conflict fears. Today’s session was generally risk-off as markets closely eyed possible conflict escalation in the Middle East. The S&P 500 was roughly unchanged, the NASDAQ was up only 21bps, US Treasury yields were down ~2-5bps across the long-end of the curve and WTI crude climbed from $76.84 per barrel last Friday to $80.06 today. Ahead of U.S. inflation data this week, concerns about resurgent market volatility are also front and center. Americas chief investment officer at UBS wealth management Solita Marcelli said, “If inflation is too low, this may heighten concerns that the US may be heading for a recession. If inflation is too high, it could encourage fears that the Federal Reserve may be unable to cut rates quickly enough to protect the economy.”

Inflation week starts with PPI tomorrow. Ahead of Wednesday’s much-anticipated CPI release, July PPI data will be released tomorrow. Surveyed estimates show that PPI is largely expected to come in at a similar or softer pace than June. Core PPI is expected to decline from 0.4% to 0.2% on a month-over-month basis, and from 3.0% to 2.7% on a year-over-year basis. On a headline basis, month-over-month PPI is expected to be unchanged from June and decline from 2.6% to 2.3% on the year. More importantly, markets will focus on the elements of PPI that feed into PCE, the Fed’s preferred inflation figure.

ECB expected to cut rates six times by end of 2025. According to a Bloomberg survey of economic forecasters, the ECB is largely expected to cut its policy rate by 25 bps once per quarter through the end of 2025. In a prior survey, the same amount of cuts were expected by 2Q26. The survey follows data that showed stagnant European private sector growth and a downward revision of Germany’s 2024 GDP growth forecast from 0.2% to 0.1%.