On the evening of July 14 Beijing time, the U.S. Department of Labor released the U.S. June CPI year-over-year growth, which plummeted from the previous 4.2% to 3.5%. Core CPI year-over-year also fell from 2.9% to 2.6%, both coming in below market expectations. Even more shocking, the CPI month-over-month recorded -0.4%, the first time monthly negative growth has occurred since the COVID-19 outbreak in 2020!
What is holding down inflation’s monster? The answer is energy. Data show that energy prices fell 5.7% month-on-month, with gasoline prices plunging 9.7%—the biggest contributor to the cooling of inflation this time. Of course, housing, food, and service prices are still rising steadily, suggesting that inflation’s stickiness should not be underestimated.
The probability of a rate hike in July fell dramatically from 46% before the data release to 20%.
Bitcoin rose by more than 3.5% within 24 hours, setting a new high since June 22. Ethereum surged even more violently, up over 6%, edging toward $1,880.
Data shows that nearly 70,000 investors across the entire market were liquidated by force, totaling about $345 million.
Wosch clearly stated that the Federal Reserve has a “zero-tolerance” attitude toward persistently high inflation. He firmly told Congress that it would never change the overall policy judgment due to fluctuations in a single month’s data. The high inflation of the past five years is the Federal Reserve’s “failure to perform.”
More importantly, he emphasized that the two major “weapons”—interest rates and the balance sheet—are still in the policy toolkit, ready to be deployed at any time.
Moreover, Wosch also announced a major reform: the establishment of five new internal research working groups, focusing respectively on artificial intelligence (AI), productivity, the central bank’s assets and liabilities balance sheet, economic data, and the inflation framework. This move appears routine, but in reality it dilutes—or even discards—the communication model of the past “forward guidance.”
A deep game: what exactly is the market trading?
First, this is a showdown between “good news being realized” and “hawkish suppression.” The good news in the CPI data was effectively priced in by the market at the moment it was released. It provides a solid reason for a price rebound. But Wosch’s tough stance is like a huge lid, firmly sealing off further upside space. The market gets stuck in a typical range with a ceiling above and a floor below. What’s more, the cloud of geopolitical tensions hasn’t lifted—ongoing clashes between Iran and the U.S. in the Strait of Hormuz could push energy prices higher again at any time, causing inflation to return in the coming months and proving that Wosch’s caution is completely correct.
Second, what the market is trading is not only inflation, but also “policy credibility.” As Bitunix analysts pointed out, the essence of this rebound is the market re-pricing the Federal Reserve’s policy credibility. Is he an “hawk” in rhetoric or a “giant” in action? Every release of economic data becomes a public test of Wosch’s reputation. As a result, the weight of the data is rising sharply. It is no longer merely an economic indicator—it has turned into a high-risk psychological game between the market and the Federal Reserve.
Finally, the market appears to be “desensitized” to geopolitical risk. One very interesting phenomenon is that even though fighting has not stopped in the Middle East, Bitcoin still managed to hold most of its gains despite the positive CPI stimulus. This signals that the “geopolitical risk premium has materially weakened.” In other words, the market seems no longer to panic-sell every headline about conflict.
In the next phase, the market will most likely move away from one-directional rallies and enter a wide-ranging choppy zone built jointly by improved “inflation data” (the floor) and “Fed hawkish deterrence” (the ceiling).
