Inflation cools, yields decline, oil surges
Summary
Investors welcomed the news of both CPI and PPI surprising to the downside. However, some of that optimism quickly abated as jobless claims ticked higher and tensions in the Middle East flared. Yields declined on the week, with the 10-year U.S. Treasury yield down 10 bps, closing at 4.41%. Equities (S&P 500) were positive in the first half of the week but declined sharply on the news of the Israeli air strikes on Iran, closing the week down -0.36%. Oil surged on the air strike news, with crude oil closing the week up about 13%.
Inflation and jobless claims
Both CPI and PPI came in below expectations with year-over-year readings of 2.4% and 2.6%, respectively. More importantly, Core CPI and PPI readings were also below expectations, with year-over-year readings of 2.8% and 3.0%, respectively. Many investors breathed a sigh of relief, as they had feared this would be the first report reflecting tariff impacts. Although inflation news was positive, jobless claims may reveal signs of a weakening labor market, coming in at 248,000 on the week. This gives the Fed plenty to ponder at its upcoming meeting, as inflation appears to be easing or at least not accelerating, while the labor side of its mandate is beginning to show signs of weakness.
Source: U.S. Employment and Training Administration via FRED®
Other key news and releases
The NFIB Small Business Optimism index came in at 98.8 last Tuesday, which beat expectations and was the highest level in three months. Uncertainty is still high among small business owners, but the uptick may be a sign that a positive trend is beginning. Consumer sentiment also partially recovered, with a reading of 60.5. These readings are notable, as the soft data seems to be recovering, easing economists' fears that the sharp declines in recent months could lead to actual declines in the hard economic indicators.
Two significant news stories over the week warrant close attention. First, the U.S. and China seem to be making progress on trade negotiations, with both countries agreeing to a framework to start easing export controls. Although details remain vague and tariffs remain in place, any progress on U.S. trade relations should bring some much-needed clarity for markets. Second, the news of the conflict between Israel and Iran also warrants close attention. The immediate reaction in the markets was relatively muted, with equities selling off about 1%, and oil increasing about 6%. However, any further escalation will likely bring volatility to the global markets.
The week ahead
The FOMC meeting will take center stage next week. Retail sales, housing starts and permits, and a few regional PMIs will also be released.
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