U.S. Inflation Shows Signs of Moderation, While the Federal Reserve Remains Cautious

Last week’s U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) both indicated that inflationary pressures continued to ease, largely driven by declining energy prices. The moderation temporarily reduced market concerns over further monetary tightening and prompted investors to reassess the expected path of future interest rates.

Nevertheless, inflation risks have not disappeared. Renewed geopolitical tensions in the Middle East have pushed energy prices higher, raising concerns that recent progress on inflation may prove temporary. Meanwhile, Federal Reserve Chair Kevin Warsh, during his first semiannual monetary policy testimony before Congress, reiterated the Fed’s commitment to restoring price stability while refraining from providing explicit guidance on the timing of future policy adjustments.

Overall, last week’s data suggest that inflation has moderated in the near term, but the Federal Reserve continues to monitor energy prices, consumer demand and broader inflation trends closely. Under current conditions, a single month’s data are unlikely to materially alter the central bank’s policy trajectory.

Bank of Canada Holds Rates Steady While Expressing Greater Confidence in the Economic Outlook

The Bank of Canada left its policy rate unchanged last week. Policymakers acknowledged that although economic activity had previously been relatively soft, recent indicators suggest that conditions are gradually improving, with economic growth expected to strengthen over time. The Bank also indicated that inflationary pressures are likely to continue moderating.

However, the Bank emphasized that considerable uncertainty remains. Rising energy prices associated with geopolitical tensions in the Middle East, together with evolving U.S. trade policies, continue to pose risks to Canada’s inflation outlook, exports and business investment. As a result, policymakers maintained a data-dependent approach and avoided providing explicit guidance regarding future policy moves.

Overall, the Bank of Canada’s assessment of the domestic economy has become somewhat more constructive, although policymakers remain cautious regarding external risks and the possibility of renewed inflationary pressures.

Resilient U.S. Consumer Spending Offsets Economic Concerns, While Technology Stocks Weigh on Equity Markets

Last week’s U.S. retail sales report showed that consumer spending remained relatively resilient despite persistent pressure from higher energy prices and elevated living costs. The data suggested that household demand continues to support the U.S. economy, helping alleviate concerns over a sharp economic slowdown.

However, U.S. equity markets faced renewed pressure as semiconductor and artificial intelligence-related stocks led a broad technology sector pullback. After months of strong gains, investors began reassessing whether AI-driven investment enthusiasm would ultimately translate into earnings growth sufficient to justify current valuations. Although early second-quarter earnings results were generally solid, investor expectations for future growth and corporate guidance have become increasingly demanding.

The market’s recent performance suggests that investors remain constructive on the long-term AI investment theme, but have become significantly more valuation-sensitive. As more major technology companies report earnings this week, their results may play a decisive role in determining the market’s near-term direction.

Middle East Tensions Push Oil Higher While Gold Remains Constrained by Interest Rate Expectations

Geopolitical tensions escalated further last week as military conflict between the United States and Iran intensified, while concerns surrounding shipping security in the Strait of Hormuz and the Red Sea continued to increase. These developments drove crude oil prices sharply higher, making energy supply risks once again a key market focus. Energy equities outperformed, while broader equity markets faced renewed pressure from rising inflation expectations and interest rate concerns.

Higher oil prices also altered the performance dynamics of other asset classes. Although geopolitical uncertainty typically increases safe-haven demand for gold, investors became increasingly concerned that rising energy prices could reignite inflationary pressures and force major central banks to maintain restrictive monetary policies for longer. As a result, higher interest rate expectations offset part of gold’s traditional safe-haven appeal, leaving precious metals under pressure throughout the week.

Looking ahead, energy markets remain heavily influenced by both military developments and ongoing diplomatic negotiations. Until greater clarity emerges regarding the Middle East, elevated volatility across crude oil, sovereign bond yields and precious metals is likely to persist.