Trump Considers Expanding Military Strikes, While Unexpected PPI Decline Fails to Ease Policy Divergence

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Summary:

Trump is leaning toward expanding U.S. military operations against Iran; U.S. June PPI posted its largest decline in 14 months, but inflation risks remain tilted to the upside......

Highlights

1. Trump leans toward expanding U.S. military operations against Iran

2. Iran’s Foreign Ministry: Iran will retaliate if the U.S. violates the agreement

3. Israel-Lebanon talks in Rome conclude, with sources saying both sides will continue advancing “pilot zones”

4. Warsh: The Fed will decide whether policy adjustments are needed to address inflation based on circumstances

5. Williams: Inflation remains too high but may have peaked, while the labor market remains resilient

6. U.S. June PPI posts largest decline in 14 months, but inflation risks remain tilted upward

7. Bank of Canada keeps rates unchanged for the sixth consecutive meeting, saying the economy has resumed growth

8. Fed Beige Book: Manufacturing activity showed slight to moderate growth in most regions

Details

Iranian Foreign Ministry: Iran Will Retaliate if the U.S. Violates the Agreement

Iran’s Tasnim news agency, citing a spokesperson from the Iranian Foreign Ministry on July 15, reported that the Iran-U.S. memorandum of understanding is only valuable to Tehran if it safeguards Iran’s national interests and security.

The report stated that Iran will fulfill its obligations as long as the other side honors its commitments. However, if the other party violates the agreement, Iran will suspend its obligations when necessary and take countermeasures.

Israel-Lebanon Talks in Rome Conclude, Sources Say Both Sides Will Continue Advancing “Pilot Zones”

According to Israeli sources on July 15, the latest round of negotiations between Israel and Lebanon held in Rome, Italy, concluded on the same day. An Israeli official said the talks made smooth progress.

Lebanese sources said the two sides reached preliminary consensus on establishing two pilot zones. One zone would be located in an area currently controlled by Israel, while the other would be adjacent to positions deployed by Israeli forces.

According to previous reports, the two sides plan to use these zones as a starting point to gradually advance arrangements related to Israeli troop withdrawals and adjustments to military deployments.

An Israeli official said that before launching the first phase of the pilot zone arrangements, both sides still need to complete additional preparations and reach further agreements. Related work is expected to be completed in the coming days.

In addition, sources said Israel hopes the committee responsible for monitoring the demilitarization process in the pilot zones will consist of Israel, the United States, and another third party, excluding France and the United Nations. However, Israeli authorities have not yet commented on the negotiations.

Waller: The Fed Will Decide Whether Policy Adjustments Are Needed to Address Inflation Based on Circumstances

Federal Reserve Chair Waller said during a Senate hearing that the Fed has not yet fully achieved its mandate of maintaining price stability. To achieve this goal, the available policy options are not limited to a single approach, including raising interest rates, keeping rates unchanged, or cutting rates.

“We will examine our policy tools and evolving economic conditions, including the balance sheet and interest rate policy, and assess whether adjustments are needed to directly address this issue.”

Waller added that investment related to artificial intelligence is pushing up prices, but it will not trigger persistent inflation. He believes that AI will support employment growth in both the short and long term, although it may create some pressure on the labor market in the medium term.

Waller also stated that President Trump has never asked him to take any inappropriate actions, and even if such a request were made, he would not comply.

Williams: Inflation Remains Too High but May Have Peaked, Labor Market Remains Resilient

New York Fed President John Williams said on Wednesday that inflation remains elevated, and the Federal Reserve must ensure that inflation continues moving back toward its 2.0% target. He added that the current monetary policy stance is appropriate.

However, Williams noted that encouraging signs suggest inflation may have peaked. He expects inflation to gradually decline over the coming quarters, falling to 3.25% by the end of this year, moving closer to the 2.0% target afterward, and eventually reaching that level by 2028.

Williams expects real GDP growth to remain between 2.0% and 2.25% this year and over the next two years. He also forecast that the unemployment rate would decline slightly to around 4.0%, noting that the labor market continues to demonstrate resilience and stability.

U.S. June PPI Posts Largest Decline in 14 Months, but Inflation Risks Remain Tilted Higher

U.S. producer prices unexpectedly declined in June, marking the largest drop in 14 months, driven by falling energy costs. The data further indicated that inflation pressures were gradually easing before the recent escalation of tensions in the Middle East.

The Producer Price Index (PPI) for final demand fell 0.3% month over month in June, the largest decline since April 2025, while economists had expected no change. May’s figure was revised down from a 1.1% increase to a 0.6% rise.

On a year-over-year basis, June PPI increased 5.5%, down from 6.0% in May.

However, the report also showed continued price increases related to AI infrastructure investment, a factor closely monitored by Fed officials. Economists believe these pressures mean the possibility of another rate hike later this year remains.

Bank of Canada Holds Rates Steady for Sixth Consecutive Meeting, Says Economy Has Resumed Growth

The Bank of Canada kept its benchmark interest rate unchanged at 2.25%, in line with market expectations, marking the sixth consecutive meeting without a policy change.

The post-meeting statement removed language regarding “continued rate hikes” and also eliminated previous references to rate cuts. Governor Tiff Macklem emphasized that the current policy rate remains appropriate, supporting economic recovery and helping inflation return to the 2% target.

Bank officials also said they are increasingly confident that the economy is recovering, although uncertainty remains high due to Middle East tensions and the direction of U.S. trade policy.

The central bank said it remains prepared to adjust policy if necessary. Inflation is expected to decline after briefly rising above 3%, while prices for non-energy goods remain largely under control.

The Bank of Canada revised its economic growth forecast, projecting GDP growth of 0.7% in 2026, down from its previous forecast of 1.2%. The bank noted that Canada’s first-quarter GDP was broadly unchanged compared with the same period in 2025.

Fed Beige Book: Manufacturing Activity Shows Slight to Moderate Growth in Most Regions

The Federal Reserve released its Beige Book regional economic report, stating that between late May and June, economic activity increased slightly to moderately in 11 of the 12 Federal Reserve districts, while one district reported no change.

The report showed that the pace of economic growth was broadly similar to the previous reporting period.

Consumer spending increased only slightly, as higher fuel prices weighed on sales of other categories of goods.

Manufacturing activity showed slight to moderate growth across most districts, mainly supported by stronger orders in data centers, machinery, and defense-related industries. Several manufacturers reported that supply chain issues had become more widespread.

Overall financial conditions remained stable, with both business lending and consumer lending increasing slightly. Transportation activity also rose modestly amid ongoing supply chain adjustments related to higher tariffs and Middle East tensions.

Overall, activity in other service sectors also increased slightly.

Today’s Focus

14:00 (UTC+8) UK May Three-Month GDP Growth Rate (MoM)

15:30 (UTC+8) Swiss National Bank Releases Monetary Policy Meeting Minutes

20:30 (UTC+8) U.S. June Retail Sales (MoM)

22:00 (UTC+8) U.S. June Pending Home Sales Index (MoM)

00:30 (UTC+8) Dallas Fed President Lorie Logan Speaks

01:25 (UTC+8) Kansas City Fed President Jeff Schmid Speaks

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