+965 2224 8361
Daily Economic Update
12.06.2025US: May’s CPI inflation muted with tariff pass-through limited for now. CPI inflation in May surprisingly softened to 0.1% m/m for both headline and core from 0.2% each in April with the impact of recent tariff hikes seemingly yet to hit retail prices. Core goods prices were unchanged from the previous month and core services increased at a slower pace of 0.2% m/m. On an annual basis, overall price rises ticked up to 2.4% from April’s 2.3%, while the core rate held steady for the third straight month at 2.8%. Inventory build-ups prior to tariff implementations and possibly input pressures being absorbed by businesses have helped keep inflation moderate despite the higher import duties (effective in phases since February). And while inflation readings have come in lower-than-expected for the fourth straight month, there is no guarantee that this will continue to be the case going forward. Futures markets continue to price in around two interest rate cuts of 25 bps by the end of 2025. Meanwhile, President Trump stated that a trade deal with China was “done” subject to his and Chinese President Xi’s approval. The deal would resume supplies of rare earth minerals and magnets from China, and in return, the US would not proceed with the threat of revoking visas for Chinese students, among other things. Importantly, Trump mentioned again that the US will be sending out letters to trading partners in one or two weeks, telling them what the tariff rate will be. This was not in line with statements by Treasury Secretary Bessent, also yesterday, that it was “highly likely” that the US will extend its July 9 deadline for important trading partners that are negotiating in “good faith”.
Oil: Brent rises to near $70/bbl on spiking Middle East tensions. Brent futures jumped 4.3% d/d on Wednesday to close at $69.8/bbl, buoyed by a return of the geopolitical risk premium amid rising tensions between the US, Israel and Iran. This was Brent’s sharpest daily gain since October 2024 and its highest closing price in two months. Yesterday, the US announced the pulling of non-essential personnel out of its embassies in Iraq, Kuwait, and Bahrain in what appears to be preparation for a potential retaliatory strike by Tehran on US assets in the region should Israel follow through on its plans to attack Iranian nuclear facilities. US President Trump also said that he is losing confidence in the US and Iran striking a deal over the latter’s nuclear program, raising the odds of a conflict should no agreement be reached. Further adding to the upward oil price momentum was a constructive weekly EIA report, which showed a 3.6 mb w/w draw (w/e June 6) in commercial inventories, eclipsing the consensus estimate of only a 2 mb w/w decline, and an attention-grabbing forecast by the same agency that US crude production would decline rather than increase in 2026. The EIA sees crude output falling to 13.37 mb/d (-0.3% y/y) next year amid lower oil prices, an ongoing pullback in the number oil drilling rigs and dwindling productivity gains in the workhorse Permian shale basin. If it materializes, this would be the first decline in US shale output since 2021. With geopolitical risk back in play and a US-China trade deal seemingly on the table, Brent is now back trading near $70/bbl, the level it was holding before “Liberation Day” tariffs and OPEC-8’s first outsized output hike announcement for the month of May.
UK: Chancellor presents budgetary spending review, expands regular and capital spending. The UK Chancellor of the Exchequer, Rachel Reeves, detailed her spending plans over the next five years that would entail higher regular spending (2.3% in real terms since 2023-24 but a slower 1.5% from 2025-26), with the biggest beneficiaries being the departments of science, innovation & technology and health & social care (including the NHS). In terms of capital expenditure, defense (taking spending to 2.6% of GDP by 2027 from 2.3%), transportation, energy, and education saw higher allocations. She also allocated £39bn for social and affordable housing over the next decade. However, there were sizable cuts to the foreign, commonwealth & development department, including foreign aid. Reeves had previously briefed her overall spending plans last Autumn and subsequently in the Spring budget statements, and accordingly, the market reaction was relatively subdued. With very little headroom to achieve the self-imposed fiscal rule of meeting regular spending from fiscal revenues, any setbacks in terms of slower economic growth or higher interest costs could yet complicate fiscal matters for the government, jeopardizing recent spending announcements.
