Our weekly podcast by Kevin Lings:

Pressure builds again for US interest rate hike  

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses the latest US inflation data and China’s GDP growth of 4.3% y/y in Q2. US CPI fell significantly in June to 3.5% y/y, reflecting lower fuel prices and reduced import duties in several categories. But inflation will rise again if the recent increase in oil prices to over $80/bbl is sustained, which could prompt a US interest rate hike.

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The focus areas during the week included:

• The major US equity indexes ended lower: the Nasdaq Composite Index lost 2.9% of its value, while the S&P 500 Index declined by 1.6%, weighed down by large-cap tech and AI-linked shares. The Dow Jones Industrial Average (-0.9%) and Russell 2000 Index (-0.5%) declined to a lesser extent. US earnings season began on Tuesday, with several major banks, including JPMorgan Chase and Goldman Sachs, reporting results that largely topped consensus estimates. However, selling of semiconductor, memory, and AI infrastructure shares weighed on the broader market. 
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• The STOXX Europe 600 Index ended a volatile week broadly unchanged, (+0.07%) as weakness in tech stocks in the US and Asia spread to Europe on Friday. Japan’s stock markets also suffered sizeable losses, with the Nikkei 225 Index falling 6.4% and the broader TOPIX Index down 2.9%. The declines were driven largely by bearish sentiment on technology stocks while the re-escalation of the conflict in the Middle East and higher oil prices undermined market sentiment. SA’s All-Share Index declined by 0.7%, with the Resources 10 index down 3.2%, which was only partially offset by a 0.6% gain in the Industrial 25 index. Year-to-date the All-Share Index is down a substantial 5.4%.
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• South Korean equities experienced significant volatility. The KOSPI ended down 8.8%, hurt by the global correction in AI- and semiconductor-related stocks, including memory-chip leaders Samsung Electronics and SK Hynix. However, the Korean market staged a brief midweek (15 July) rebound as investors rotated back into AI stocks.
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• The US bond market generated positive returns (slightly positive). Yields decreased across most maturities, helped by the lower-than-expected inflation reports (both CPI and PPI) in the week and subsequent repricing of interest rate expectations. The yield on the 10-year government ended at 4.55%, down from 4.57% at the end of the previous week.
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• In June 2026 US consumer inflation declined by 0.4% m/m, which was well below market expectations for a decline of 0.1% m/m. This pulled the annual rate of inflation down from 4.2% y/y to 3.5% y/y – also well below market expectations for a moderation to 3.8% y/y. Critically, core consumer inflation was unchanged in the month (below expectations for a rise of 0.2% m/m), which resulted in the annual rate of core inflation slowing from 2.9% to 2.6%. This is the lowest level of core inflation since March 2026. The market expected core inflation to slow to an annual rate of 2.8%. A breakdown of the data reveals that gasoline prices (unsurprisingly) declined by a substantial 9.7% in the month (27.2% y/y) after rising by 7% in May and 5.4% in April; airline fees increased by a modest 0.2% m/m, helped by the lower fuel price; shelter inflation increased by a modest 0.1% m/m; clothing prices declined by 0.6% m/m; used car prices fell 0.2% m/m; vehicle insurance fell 0.4% m/m; and new vehicle prices were unchanged. All of this is a good indicator of subdued inflation. In fact, it is difficult to find any major category of US inflation that reflected a strong upside surprise, perhaps with the exception of some subcomponents of the food category, computer software, and the cost of sporting events.  The lower US import tariffs – relative to a year ago – are probably helping to subdue some key retail categories. The key upside risk to headline inflation is the recent resurgence in the oil price. This will push gasoline prices sharply higher over the next couple of weeks and partially reverse this month’s better-than-expected inflation reading through its direct inflation on fuel prices as well as the cost of airline travel.
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• US producer inflation surprised to the downside in June, falling 0.3% m/m. The market expected PPI to remain unchanged month-on-month. This pulled the annual rate of PPI inflation down from a revised 6% to 5.5%. Leading the monthly decline in headline prices was a 1.4% m/m decline in goods prices, driven largely by a drop in energy prices. Encouragingly, inflationary pressures also eased outside the energy component. Core PPI rose by 0.2% for the month, also below forecasts for a 0.4% increase, and the annual rate of PPI core inflation was measured at 4.7% y/y. The market-implied probability of a July rate hike fell roughly from 40% before the CPI and PPI inflation reports to about 14% by Friday afternoon, according to the CME FedWatch tool.
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• US consumer confidence, as measured by the University of Michigan’s preliminary consumer sentiment survey for July, indicated a solid overall improvement in sentiment for the month, driven by easing fuel prices, although the reading was still 12% lower year-on-year. In terms of household inflation expectations, the survey showed that expectations for inflation in the year ahead dropped to 4.2% from 4.6% in June, while long-run expectations were unchanged at 3.3%.
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• US retail sales rose by 0.2% m/m in June, in line with market expectations but down from May’s upwardly revised reading of 1% m/m. However, excluding gas stations, sales rose 0.7% m/m in the month, reflecting the impact of lower gas prices on the headline figure. (US retail sales data are reported in nominal terms.) US consumer spending has remained solid in the first half of the year, with households probably supported by elevated tax refunds, along with supportive labour-market conditions over the past four months, helping to offset the impact of higher oil prices.
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• US weekly jobless claims declined to 208 000 in the week ended 11 July. This is down from the prior week’s revised reading of 216 000 and the lowest level since 2 May. Continuing claims were also lower, declining 16 000 to 1.805 million. The US labour market remains steady to strong.
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• US pending home sales fell 5.4% month-on-month in June, while the National Association of Home Builders’ Housing Market Index showed declining homebuilder confidence amid elevated economic uncertainty and ongoing affordability challenges. Data from Freddie Mac showed that the average interest rate for a 30-year fixed rate mortgage climbed to 6.55%, the highest level since August 2025.
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• South African mining production fell by a substantial 5.2% m/m in May after increasing by 3.1% m/m in April. This was far worse than market expectations for a decline of 0.4% m/m. Over the past year production has fallen by 5.4% and has fallen by 1.7% quarter-on-quarter. In the past three months the fall-off in mining output has been broad-based, including declines in coal (-0.4% q/q), manganese ore (-0.5% q/q), and PGMs (-0.3% q/q).
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• China’s gross domestic product grew by 4.3% y/y in the second quarter of 2026, below market expectations for growth of 4.5% and down from 5% in Q1 2025. The growth rate was also below the lower end of the government’s full-year 2026 growth target range of 4.5% to 5%, although in the first half of the year China’s GDP grew by 4.7%, which is within the target range. Importantly, industrial production in June rose by a stronger-than-expected 5.3% y/y, while retail sales increased by a more modest 1% y/y after declining by 0.6% in May. However, fixed asset investment activity fell by 5.7% y/y in the first half of 2026, including declines of 2.4% in infrastructure, 1.2% in manufacturing, and 18% in property investment.
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• China’s exports rose by 27% year-on-year in June, up from 19.4% in May and above market expectations for growth of 19%. Imports increased by a robust 36% y/y, up from 27.4% in May. Despite the large increase in imports, China’s trade surplus widened to $125.6 billion. Higher semiconductor prices and strong overseas demand for data processing equipment and vehicles supported export growth. Overall, the ongoing weakness in household consumption, as well as subdued business investment and a lacklustre property sector highlighted the economy’s reliance on external demand and its exposure to shifts in global technology demand and trade policy.
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• The Bank of Korea (BoK) increased its benchmark lending rate by 25 bps to 2.75%, mainly because its forecast indicates that inflation and economic growth in South Korea will remain elevated. This is the first interest rate hike in more than three and a half years, and a further increase appears likely. The decision was unanimous. Governor Hyun Song Shin (who is one of the world’s leading economists and was recently appointed as governor) said “the board judged that it will be necessary to continue a policy stance consistent with further rate hikes”. All but one of the 37 economists polled by Reuters in the week before the decision expected a 25 bps hike. The market’s expectation of a rate hike was boosted by comments from Shin in June, when he said the BoK needed to tighten policy “before it was too late”. The BoK has held rates at 2.5% since May 2025, when it ended an easing cycle that began the previous September. Governor Shin said the global economy was expected to continue growing moderately on the back of sustained AI-related investments, although uncertainty surrounding the situation in the Middle East remained high. “Inflation in major economies is expected to remain above target levels for some time as the impact of the rise in energy prices feeds through with a time lag,” he said.
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• The Bank of Canada (BoC) kept its policy interest rate unchanged at 2.25% for the sixth consecutive meeting. In a statement after the decision on 15 July, the bank said growth was picking up and inflation was projected to ease gradually following a recent spike. However, it added that there were still “important risks and uncertainties” related to the war in the Middle East and US trade policy. The closure of the Strait of Hormuz and the resulting spike in commodities prices contributed to annual headline inflation reaching 3.2% in May. This was up from 2.8% in April and the highest level recorded since late 2023. Core inflation edged slightly up from 2.1% to 2.2% over the same period. The BoC targets inflation of 2%. According to the bank, “near-term inflation expectations are sensitive to changes in gasoline [petrol] prices but longer-term inflation expectations remain well anchored. War-related cost pressures are still working their way through some consumer prices but are being offset by downward pressure on other prices from continued economic slack.” The bank said it expected headline inflation to stay elevated in June and then “ease gradually” in the coming months, before returning to target in early 2027.
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• Industrial output in the Eurozone fell by 0.2% month-on-month in May 2026, although the market expectation was for an increase of 0.2% m/m. The decline was due primarily to lower production of durable consumer goods and intermediate goods. The steepest decline was in Ireland, while Germany and Spain both continued to show an increase in output.
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• Japan’s core machinery orders dropped 12.4% m/m in May, which was significantly weaker than the expected decline of 4.2%, reversing the strong gain of 8.7% m/m in April. The larger-than-expected decline reflected broad-based weakness in business investment. Among manufacturers, orders from shipbuilding fell the most, and in the non-manufacturing sector, orders weakened significantly in real estate.
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• On Friday, Andy Burnham officially became leader of the governing Labour Party in the UK. He will become prime minister on Monday, 20 July.

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