Betting too heavily on a patient Fed

Fed Chair Kevin Warsh said in his testimony before the House Financial Services Committee that the U.S. central bank will have no tolerance for persistently elevated inflation.

According to Barclays, “it is likely too early to declare the oil price shock behind us,” while Macquarie Group, after the U.S. data, continues to expect a 25 bps rate hike ahead as the next policy move.

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Euro zone government bond investors took June's U.S. inflation report in their stride, but there is evidence building that the Fed may not have very much room to keep rates on hold, given the latest flare-up in hostilities in the Middle East.

Katy Stoves, investment manager at Mattioli Woods, says that while U.S. headline inflation slowed in June, when the U.S. and Iran signed their memorandum of understanding, there was a risk it could heat up again.

“There is potentially a structural bid beneath oil that markets may be underestimating: governments that drew down strategic petroleum reserves recently now need to replenish them,” she says.

“This represents a persistent source of demand which, combined with renewed escalation of tensions in the Strait of Hormuz, suggests the window to buy cheaply may be closing quickly,” she adds.

“With growth solid and the labour market tight, the Fed's bias looks more likely to shift towards hikes than cuts.”