The dollar index (DXY00) on Tuesday fell by -0.43% due to the increased chances of a Fed rate cut after the CPI report. The market boosted the chances for a Fed rate cut at the September meeting to 96% from 88%, after Tuesday's US CPI report was roughly neutral and did not contain any nasty surprises.
The July US CPI report of +0.2% m/m was roughly in line with market expectations. The July CPI year-on-year figure of +2.7% y/y was unchanged from June and was slightly weaker than expectations for a +0.1 point increase to +2.8%. The July US core CPI report of +0.3% m/m was in line with expectations. The July year-on-year core CPI figure of +3.1% y/y was up from June's +2.9% and was slightly stronger than market expectations of +3.0%. July's headline CPI of +2.7% y/y and core CPI of +3.1% y/y were up from the post-Covid 4.25-year lows of +2.3% and +2.8%, respectively, posted earlier this year.
Despite the neutral CPI report, the 10-year T-note yield rose +0.4 bp to 4.289% on concern about a new attack by President Trump on Fed Chair Powell. Mr. Trump said in a Truth Social post Tuesday morning that he is considering allowing a lawsuit against Mr. Powell related to construction work at Fed buildings. The markets are concerned about the inflation risks involved with the attempt by the Trump administration to push Mr. Powell out of the Fed as a means to artificially push interest rates lower.
In recent tariff news, President Trump extended the tariff truce with China, which was to expire on Tuesday, for another 90 days. Last Wednesday, President Trump announced that he will impose a 100% tariff on semiconductor imports. Still, companies would be eligible for exemptions if they demonstrate a commitment to building their products in the US. However, the US will levy a separate tax on imports of electronic products that employ semiconductors. Also, President Trump announced last Wednesday that he will double tariffs on US imports from India to 50% from the current 25% tariff, due to India's purchases of Russian oil. Last Tuesday, Mr. Trump said that US tariffs on pharmaceutical imports would be announced “within the next week or so.” According to Bloomberg Economics, the average US tariff will rise to 15.2% if rates are implemented as announced, up from 13.3% earlier, and significantly higher than the 2.3% in 2024 before the tariffs were announced.
