Soft Inflation Data Lift Equities as Iran War and China Slowdown Cloud Outlook

Tuesday's session delivered a decisive risk-on tilt driven by back-to-back soft US inflation prints, with the S&P 500 closing at 7,572.40 (+0.76%) and the Nasdaq surging to 26,269.23 (+1.53%) — both well above their 20- and 50-day moving averages of 7,477/7,440 and 25,992/26,061 respectively, signaling sustained technical momentum. The 10-year Treasury yield fell to 4.54% (-1.39%), reflecting rapid repricing of Fed tightening risk, while the US Dollar Index slid to 100.50 (-0.77%), its weakest print in weeks. Gold edged lower to $4,044.00 (-0.42%), weighed down by easing rate-hike fears even as geopolitical tensions remained acute — notably, gold now trades well below its 50-day moving average of $4,325 and its 200-day moving average of $4,488, with RSI at a subdued 41.3 suggesting limited near-term momentum. WTI crude settled at $79.60 (+0.33%), with the marginal gain belying the severity of the underlying supply shock.

The inflation narrative dominated price action. June PPI fell 0.3% month-over-month — a sharp reversal from the +0.6% reading in May and the +1.1% spike in April — with energy prices leading the pullback. On a 12-month basis, PPI held at a still-elevated +5.5%, but the directional shift mattered enormously for rate expectations. This followed Monday's June CPI, which showed headline inflation cooling to 3.5% year-on-year with a -0.4% monthly drop — the largest monthly decline since April 2020. Together, these prints have materially reduced the probability of a July 28–29 FOMC rate hike, though Fed Chair Kevin Warsh, in his second consecutive day of Congressional testimony before the Senate Banking Committee, was careful to preserve optionality. Warsh acknowledged the improvement but explicitly rejected any 'mission accomplished' framing, noting that rates remain a live tool if conditions warrant. With the fed funds rate at 3.50%–3.75%, markets are now treating the July meeting as on hold while watching Q3 data closely for any re-acceleration.

Geopolitically, the Iran conflict entered a new phase of intensity that should not be underestimated by markets. CENTCOM launched two separate airstrike waves on July 15 — the fifth consecutive day of US operations — targeting missile infrastructure on Greater Tunb Island and command and air-defense facilities near Bandar Abbas. The US simultaneously reinstated a naval blockade of Iranian ports and disabled an oil tanker bound for Kharg Island, Iran's primary crude export terminal. Iran's IRGC has threatened to extend disruptions to the Bab el-Mandeb Strait in addition to the functionally closed Strait of Hormuz, through which roughly 20% of global oil and natural gas supplies normally transit. The muted reaction in crude — WTI at $79.60, Brent at $84.95 — reflects a market that has partially priced in the disruption but also benefited from demand-side relief following China's weak Q2 GDP and the global growth slowdown narrative. Washington also imposed fresh sanctions on 50 individuals, entities, and vessels linked to Iranian oil shipping; many of these measures may overlap with congressionally mandated sanctions frameworks such as the Iran Sanctions Act, meaning any future diplomatic unwinding would require legislative action rather than executive order alone, materially constraining dealmaking flexibility.

China's Q2 GDP release added another layer of macro complexity. Output grew just 4.3% year-on-year — the slowest pace since Q4 2022's COVID lockdowns and below the Reuters consensus of 4.5% — dragged lower by a property sector in free fall (real estate investment -18% in H1), weak household consumption, and the oil shock feeding through to industrial costs. Fixed-asset investment contracted +0.33% in the first half, worse than the -4.9% forecast. The silver lining was exports, which surged 27% in June on AI-related electronics demand, providing a floor under industrial output. Chinese equities edged higher on stimulus expectations ahead of the late-July Politburo meeting, where authorities face mounting pressure to deploy fiscal support if the full-year 4.5%–5.0% growth target is to be salvaged. Copper and other industrial metals watched the data closely — the combination of Chinese demand weakness and Iran-driven supply-chain disruption creates a challenging cross-current for base metals into H2 2026.

Looking ahead, the convergence of a softening US inflation path, a functionally closed Strait of Hormuz, and a Chinese economy firing on fewer cylinders sets up a pivotal few weeks. The July 28–29 FOMC meeting is the immediate focal point; unless August's data brings a sharp reversal, the Fed appears likely to hold, but Warsh's deliberate hawkishness keeps September tightening a live risk. The Politburo meeting at month-end could catalyze a meaningful fiscal stimulus announcement in China, which would be the most significant positive catalyst for global risk appetite and copper demand. In the interim, energy markets will remain hostage to the Iran conflict's trajectory — any Iranian move to operationalize a Bab el-Mandeb closure would add another 10–12% of global seaborne trade to the disruption zone and would force a fundamental reassessment of the current geopolitical risk discount embedded in crude prices.