Central banks face shifting monetary policy outlooks as international oil prices returned to pre-US-Iran war levels. WTI crude futures fell below $70 per barrel, nearing the February 27 closing price of $67.02, while Brent crude dropped to $70 in early July from over $126, falling below the late-February level of $72.48. The decline followed the US-Iran ceasefire memorandum of understanding signed in mid-June, which raised expectations of increased oil supply, with market estimates suggesting Hormuz Strait oil traffic already exceeded 10 million barrels per day. Federal funds futures markets reduced the probability of at least one Fed rate hike this year from over 86% after the June 16-17 FOMC meeting to approximately 75%, while the probability of a rate hold rose from 14% to about 24%, reflecting falling oil prices and weaker-than-expected US employment data.
WTI and Brent Crude Prices Fall to Pre-War Levels
WTI crude futures, which approached $120 per barrel after the late-February outbreak of the Iran war, dropped below $70, nearing the February 27 closing price of $67.02. Brent crude futures fell to $70 in early July from over $126, dropping below the late-February level of $72.48. Market participants attributed the decline to increased supply expectations following the US-Iran ceasefire memorandum of understanding signed in mid-June. Estimates indicate Hormuz Strait oil traffic already surpassed 10 million barrels per day.
Fed Rate Hike Probability Declines from 86% to 75%
Federal funds futures markets initially priced in an over 86% probability of at least one rate hike this year following Fed Chair Kevin Warsh's first FOMC meeting on June 16-17, which markets interpreted as hawkish. The probability has since retreated to approximately 75% amid falling oil prices and weaker-than-expected US employment data. The probability of a rate hold, which fell to around 14% immediately after the FOMC meeting, rose to about 24%. Barclays noted that Warsh "did not provide clues about how policy would respond to data at a time when the economy has reached an important turning point," citing employment reports suggesting labor market slowdown and concluding that Fed rate hikes remain uncertain. Robin Brooks, senior fellow at the Brookings Institution and former Goldman Sachs FX strategist, stated that the oil supply shock from the Iran war has largely ended and that "markets are excessively pricing in additional Fed rate hikes." UBS forecast rate cuts next year, arguing that markets overestimate the Fed's tightening likelihood.
Fed Chair Warsh Provides Mixed Signals at ECB Forum
At the European Central Bank forum in early July, Fed Chair Kevin Warsh offered no clear guidance on rate direction. Warsh stated, "If you look around, you can confirm that prices are too high," while adding, "Expected inflation has fallen over the past four weeks. Inflation risks have also decreased." Analysts interpreted the remarks as providing limited policy direction despite significant economic developments.
ECB, RBNZ, and RBA Signal Policy Uncertainty
The Reserve Bank of New Zealand held its policy rate last month with a 3-3 vote split between members favoring a hike and those supporting a hold, with Governor Anna Breman's deciding vote maintaining the hold. Initial post-meeting expectations favored a July hike, but recent oil price declines and reduced inflation risks have led some analysts to forecast continued holds. The European Central Bank faces similar reassessment after June consumer price index data showed 2.8% year-over-year growth, below the 3% forecast and the prior month's 3.2%. ECB President Christine Lagarde stated at the forum in early July, "I think upside risks to inflation and downside risks to growth are more balanced overall than a few weeks ago," suggesting reduced risks to eurozone inflation and growth. Some ECB Governing Council members, including the Bank of Greece governor, mentioned the possibility of holding rates. The Reserve Bank of Australia kept the door open to further hikes given inflation remains above target, while noting the need for time to assess the effects of tightening measures implemented since February.
US CPI and PPI Data Scheduled for July 14-15
Market participants await the June FOMC meeting minutes scheduled for release on July 8 (local time) to confirm whether Chair Warsh's stance was as hawkish as markets interpreted. US June consumer price index and producer price index data, scheduled for release on July 14 and 15 respectively, will provide insight into how much the oil price decline has been reflected in inflation measures. Eurozone CPI data is scheduled for July 17, and Australia CPI data for July 29. Analysts expect heightened sensitivity to economic indicators as central banks and markets stand at a potential turning point driven by falling oil prices.
FAQ
Q: What caused WTI and Brent crude prices to fall in early July?
A: WTI crude futures fell below $70 per barrel and Brent crude dropped to $70 in early July following the US-Iran ceasefire memorandum of understanding signed in mid-June, which raised expectations of increased oil supply. Market estimates suggest Hormuz Strait oil traffic already exceeded 10 million barrels per day.
Q: How did Fed rate hike probabilities change after the June 16-17 FOMC meeting?
A: Federal funds futures markets initially priced in over 86% probability of at least one Fed rate hike this year after the June 16-17 FOMC meeting. The probability has since declined to approximately 75% amid falling oil prices and weaker-than-expected US employment data, while the probability of a rate hold rose from around 14% to about 24%.
Q: When will key US inflation data be released?
A: US June consumer price index and producer price index data are scheduled for release on July 14 and 15 respectively. The June FOMC meeting minutes are scheduled for release on July 8 (local time).
