Inflation eases, but Fed remains on alert

For the week ending 17 July 2026

As of midday Friday, global equities were modestly lower on the week. The yield on the benchmark U.S. 10-year Treasury note was little changed from week-ago levels at 4.53% but below the 4.63% reached on Tuesday amid tit-for-tat strikes in the Middle East between the U.S. and Iran. The price of a barrel of West Texas Intermediate crude oil rose US$9.50 to US$81.50 amid the increased military action. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 19.3 from 17.4. 

Macro news

Softer U.S. inflation cools July Fed hike talk 

U.S. inflation data surprised to the downside in June as headline CPI fell 0.4% month over month, the first decline since 2020, while core CPI was unchanged. On a year-over-year basis, CPI eased to 3.5% from 4.2% in May, and core inflation slowed to 2.6% from 2.9%. Producer prices also rose less than expected, falling 0.3% month over month and rising 5.5% from a year earlier, below the 6.2% consensus estimate. Yields declined after the CPI release, and though the market had assigned roughly even odds to a July rate hike, that was effectively priced out after the softer inflation data. Ahead of Tuesday’s CPI release, Fed Governor Christopher Waller had said that the central bank may need to hike rates if this week’s core inflation data was “hot,” which prompted traders to up their bets on a July hike in advance of the data release.

Fed Chairman Kevin Warsh nevertheless pushed back against overinterpreting just one data point. He told the House Financial Services Committee that the FOMC has “no tolerance” for persistently elevated inflation and said policymakers should ensure that short-term price changes do not broaden out.

New York Fed President John Williams said there are encouraging reasons to think inflation has peaked, but he also emphasized that the Middle East remains a risk to the outlook, and like Warsh, he warned officials not to get too excited about one favourable CPI print. However, on Thursday, three Fed officials struck a more cautious tone. Dallas Fed President Lorie Logan called for modestly higher rates to tame inflation, while Kansas City Fed President Jeff Schmid warned that inflation remains too hot and has been above target for too long. Vice Chair Philip Jefferson said the central bank may need to hike rates if inflation doesn’t ease soon.

U.S.–Iran conflict intensifies

The U.S.–Iran conflict escalated this week as the Trump administration reinstated a blockade against Iran and said the U.S. would impose a 20% fee as compensation for safeguarding cargo through the Strait of Hormuz. Trump later walked that back, however, saying that he would replace the proposed cargo fee with broader trade and investment arrangements with individual Gulf states. The blockade covers the entirety of the Iranian coast, including ports and oil terminals, though it doesn’t impede neutral passage through the strait. U.S. Central Command said the blockade resumed on Tuesday at 4 pm EDT and that U.S. forces continue to support traffic through the strait. 

Iran said Thursday that it will not allow the U.S. to interfere in the Strait of Hormuz, calling U.S. involvement in the operation of the waterway “Iran’s invincible red line” and warning that cooperation with the U.S. by other Gulf states could be viewed as an act of war. Iranian officials also threatened to attack oil and gas infrastructure across the Middle East if Iranian civilian infrastructure is targeted by the U.S. Iranian attacks on shipping have slowed — but not stopped — the shuttle runs used to move oil beyond the strait to where it is then transferred to tankers bound largely for Asia, a strategy that helped ease severe crude shortages early in the conflict. Separately, the U.S. is reportedly backing talks to revive a shuttered pipeline from Iraq to Syria that would bypass the strait, further reducing Iran’s leverage over the global energy supply. 

Adding another source of regional oil-market risk, the Houthis fired missiles at Saudi Arabia and later threatened to attack Saudi oil facilities.

Tech stocks eyed as China appears to be closing the AI gap

AI and semiconductor stocks have come under increased scrutiny in recent sessions on concerns that cheaper Chinese AI models are rapidly closing the capability gap with their expensive U.S. counterparts. If U.S. companies adopt these cheaper models, investors fear that it could result in lower levels of capex to build out U.S. AI infrastructure, sending ripple effects across the technology ecosystem. Volatility in South Korean stocks, whose main index is dominated by two memory chip makers, prompted policymakers this week to suspend new listings of single-stock leveraged ETFs.

Japan looks to spur domestic investment

Stepping up efforts to attract cash to domestic markets, Japan’s finance minister Satsuki Katayama floated the idea of adding government bonds to a tax-free investment program for individuals and said the nation’s massive pension fund will adjust its holdings if needed. However, by law, the fund’s investment decisions must be guided by the objective of generating sustainable, long-term returns for pension beneficiaries, meaning any increase in domestic holdings would need to be justified on investment grounds rather than broader economic or policy objectives. 

Quick hits

• U.S. retail sales rose 0.2% month over month in June while core sales rose 0.5%. Both measures of May sales were revised higher by 0.1%, to 1% and 0.7%, respectively.
• U.S. industrial production rose 0.1% in June, slightly below expectations.
• The British government designated Iran’s Islamic Revolutionary Guard Corps a terrorist organization, effectively blocking U.K. insurance companies and U.K.-linked ships from paying fees to Iran for Strait of Hormuz transit.
• U.S. housing starts rose 19% in June, reversing a 15.2% decline in May.
• The Bank of Canada left rates unchanged at 2.25%, citing signs of improvement in the economy. Separately, Fitch Ratings affirmed Canada's AA+ sovereign debt rating with a stable outlook. 
• Earnings from the U.S.’s largest banks were firm, with executives pointing to resilient consumers and strong capital markets activity during earnings calls.
• A Wall Street Journal report noted investor caution around heavy stock and bond issuance and slowing buybacks. It noted, however, that the scale of issuance remains small relative to the roughly US$80 trillion U.S. equity market. 
• Following a year-long investigation, the U.S. imposed 25% Section 301 tariffs on certain Brazilian imports.
• U.S. pending home sales fell 5.4% in June.
• German Chancellor Friedrich Merz said U.S. tariffs have badly damaged Germany’s economy. 
• U.S. Trade Representative Jamieson Greer downplayed expectations for new trade deals at the Trump–Xi summit scheduled for September.
• The U.K. economy expanded 0.1% in May, beating expectations for a 0.1% contraction.
• The Bank of Korea raised rates on Thursday by 25 basis points to 2.75%, citing above-target inflation and strengthening growth.
• On Thursday, Trump accused China of meddling in the 2020 U.S. presidential election.
• According to Chinese customs data, China’s chip exports rose 96% in the first half amid the AI boom, with robotics exports posting similar gains.
• New York is set to become the first U.S. state to impose a moratorium on construction of new datacenters, instituting a one-year ban.
• A bill working its way through the U.S. Congress would give President Trump the authority to impose tariffs of up to 100% on the five largest buyers of Russian oil and gas, creating a potential geopolitical use of tariff authority.