Inflation Week Battles Middle East News for Investor Attention

• Hostilities resumed over the weekend in Iran, and the only good thing to say about that is oil futures are up less than in early March. WTI futures have increased $2.43 to $73.82/bbl, or 3.46% higher, this morning. That’s well off the $100 levels of early March but that obviously assumes a quick return to peace negotiations, and traffic through the Strait, and that remains to be seen. The Middle East headlines will certainly drive markets, but after last week’s dearth of data, the pace increases this week with most of the releases focused on inflation. Leading the way will be tomorrow’s June CPI release followed by Wednesday’s wholesale PPI report. On Thursday, inflation reports take a breather with June Retail sales, but inflation numbers quickly return on Friday with Import/Export prices. If all these reports are too much for you, don’t worry, we have new Fed Chair Kevin Warsh making his debut on Capitol Hill with two days of testimony in his semi-annual Humphrey-Hawkins obligation. He’ll start in the House tomorrow and move to the Senate on Wednesday. Hopefully, the politicos will be better at pulling information from the new Fed Chair than was the case with the economic journalists. Currently, the 10yr is yielding 4.58% up 1bp, while the 2yr is yielding 4.23%, up 2bps on the day, and matching a yearly high set back on June 22.

 

• Tomorrow, June CPI opens the data door this week with expectations for headline inflation at -0.1% MoM with the YoY headline decreasing from 4.2% to 3.9%, as the oil price decline leads the headline numbers lower. Core CPI (ex-food and energy) is expected to increase 0.3% MoM with the core YoY rate unchanged at 2.9%. The good news is the next couple months see a pair of 0.3% monthly prints roll off from last year. Thus, while annual core CPI is not expected to move lower in June, if we get a couple 0.2% prints or lower in July and August the YoY rate will move lower, perhaps by a tenth or two. After that, it’s 0.2% prints rolling off (Sept. and Oct.), so, expecting much improvement by the September FOMC meeting is probably not happening. Thus, we still see a possibility of a rate hike at the September or December meeting. We see the October meeting as a pass given the proximity to the November elections, even though Fed members will never confess to that.

 

• The inflation fun doesn’t stop there as we’ll get the June PPI Report on Wednesday. Expectations are that overall wholesale inflation is expected to be unchanged after moving up 1.1% in May. PPI ex-food and energy is expected increase 0.4%, same as May. PPI ex-food, energy, and trade is expected to increase 0.4%, half the 0.8% increase the prior month. So, given the drop in energy prices in June the wholesale price universe looks much more favorable than it did in May, and that may roll down to the retail level in a few months. Once we have CPI and PPI this week, analysts will start calculating estimates for PCE which will be released at month-end.

 

• June Retail Sales on Thursday provides a nice pause in inflation reports with sales expected to increase 0.3% vs. 0.9% in May, as dip in gas prices lead to lower total sales. Ex autos and gas, monthly sales are expected to increase 0.4% vs. 0.5% the prior month. The Control Group – a direct feed into GDP and considered a better core look at spending is expected to increase 0.4% vs. a robust 0.7% in May. The caveat we always offer for this report is that it’s not inflation adjusted so be careful with reading nominal increases especially in this period of heightened price pressure. In any event, with that warning, and excluding gas purchases, sales are expected to be decent but not up to the solid May results.

 

• If the break in inflation numbers is making you wistful, don’t worry, the June Import/Export Price Report will finish off the inflation troika with a Friday release. The May numbers were ugly with import prices up 1.9% MoM, and ex-petroleum up a robust 0.8%. So, expectations are that June’s numbers will be lower but still elevated given the upward shift in transportation costs. Also, note that this report is before tariff costs so consider that as companies talk about passing through previous tariff expenses that they ate in order to maintain sales up to this point.

 

• Finally, the preliminary University of Michigan Sentiment Survey for July will be released on Friday. Recall that in June, the overall sentiment measure dipped to 49.5 but expectations are for a slightly better 51.3 print in July, no doubt owing to slightly cheaper gas. Year-ahead inflation expectations were 4.6% in June and something in the low 4% range is expected on Friday. Even a lower 4% reading will substantially exceed the 3.4% reading seen in February prior to the start of the Iran war, along with all 2025 readings and the 2.3-3.0% range seen in the two years pre-pandemic. Long-run inflation expectations are expected to inch down from the 3.3% in June. In 2024, values ranged between 2.8% and 3.2%, while in 2019-2020, they were consistently below 2.8%. So, while inflation expectations should look better from June, they will remain well above pre-war levels and pre-pandemic expectations. That will be noted by the FOMC Inflation Hawks.

 

• Finally, I sat down with Joe Keating from our Wealth Management Group last week on the latest edition of The Community Bank Podcast. We discussed the new Fed Chair, the outlook for the economy, interest rates, and stocks. It was an informative and timely conversation. Give it a listen

 

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Fed Funds Futures at 70% odds for a Rate Hike at the September FOMC Meeting

Source: CME Group

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June CPI Due Tomorrow – Expectations are for Overall at 3.9% (-0.3%) and Core Unchanged at 2.9% YoY

Source: BLS

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Univ. of Michigan July Consumer Sentiment – Expected to Improve Slightly off Record Low

Source: Univ. of Michigan