Trump said the US would resume attacks on Iran which weighed on risk-sensitive assets. Brent crude gains on the lift in tensions. US CPI closely aligns with expectations. Gold prices extend lower

A renewed flare-up in US-Iran tensions lifted oil prices and weighed on risk sentiment. President Trump said the US would resume attacks on Iran later today, raising doubts over whether the fragile ceasefire will hold. Brent crude rebounded from near US$91 to above US$94 per barrel, while the S&P 500 is down more than 1% in afternoon trade. Currency and rates markets were little changed, with US CPI broadly matching expectations.

Gold has extended its recent decline, falling towards $4,100 per ounce and the March low. Prices have declined in recent weeks as stronger inflation expectations lifted the prospect of Fed tightening and weighed on non-interest-bearing assets. It is now around 20% below levels seen before the Iran war began, with the break below its 200-day moving average adding to selling pressure.

US CPI rose 0.5% in May and 4.2% y/y, with higher energy prices accounting for more than half the monthly increase. Outside energy-sensitive categories, however, inflation pressure was more contained. Core CPI increased a relatively subdued 0.2% m/m, leaving the annual rate at 2.9%, as softer consumer demand helped offset broader supply-side pressures. Preliminary estimates suggest the core PCE deflator rose 0.3% in May, pending further detail from the PPI data.

Market pricing for the Fed was little changed after the CPI data and continues to indicate around 25bp of tightening by December. The Treasury curve is marginally steeper, with front-end yields steady while the 10-year yield rebounded from session lows towards 4.55%. The US$39 billion 10-year auction was well received, drawing strong investor demand ahead of 30-year supply tomorrow.

There were limited net moves across G10 currencies in offshore trade, with the US dollar index confined to a narrow range. The Norwegian krone was the only major currency to move meaningfully, appreciating in line with higher oil prices. NZD/USD dipped towards 0.5800, before recovering to trade close to yesterday’s local close.

The Bank of Canada left its policy rate unchanged at 2.25% for a fifth consecutive meeting, in line with market and economist expectations. The decision balanced weak domestic activity against upside inflation risks from higher energy prices. The Bank noted limited evidence so far of broader pass-through from energy costs, but Governor Tiff Macklem said policy would need to remain “nimble” given elevated uncertainty. Markets continue to price about 25bp of tightening by year-end, little changed from before the decision, while the CAD was broadly steady.

China’s May inflation data hinted at ongoing demand weakness. CPI rose 1.2% y/y, unchanged from April and slightly below expectations. In contrast, producer prices accelerated to 3.9% y/y, driven by higher commodity costs and firm demand in electronics and nonferrous metals. The widening divergence between CPI and PPI underscores limited pass-through and continued softness in domestic demand amid housing-sector weakness and intense competition.

NZ fixed income yields fell in the local session yesterday. Swap rates declined 2bp across the curve, maintaining 2- and 5-year rates near the bottom of recent ranges. Bonds outperformed modestly, with 10-year yields down 3bp to 4.53%, now below equivalent maturity US Treasuries. The market looks ahead to today’s weekly government bond tender, split between Apr-29 and Apr-33 lines at $225m each.

The ECB is expected to lift the deposit rate by 25bp to 2.25% this evening alongside the release of updated staff projections. Policy settings are towards the lower end of the estimated 1.75%–2.75% neutral range and the Bank is likely to retain its data-dependent, meeting-by-meeting guidance. Markets price around 70bp of tightening by year-end. US PPI and jobless claims are also due, with the former helping refine estimates for core PCE.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.