This has turned out to be another sensational year for equities. Since early June, the timeless Dow Jones Industrial Average (DJINDICES: ^DJI), broad-based S&P 500 (SNPINDEX: ^GSPC), and technology-propelled Nasdaq Composite (NASDAQINDEX: ^IXIC) have catapulted to fresh highs. However, danger is always lurking on Wall Street.
While the July inflation report is fanning the flames of optimism among investors and lowering the odds of a rate hike when the Federal Open Market Committee (FOMC) meets in mid-September, Trumpflation (inflation that's specifically driven by President Donald Trump's policies) has shown no signs of reprieve -- and that's a big problem. This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia.
For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue » Historically, there's nothing the stock market values more than predictability, and that's precisely what it got on Aug. 12, when the Bureau of Labor Statistics published the July inflation data. For a second consecutive month, trailing 12-month (TTM) inflation eased.
After TTM inflation peaked at a three-year high of 4.2% in May, headline inflation retreated to 3.5% in June and now 3.4% in July -- exactly as economists had forecast. The primary catalyst responsible for calming nerves and dramatically lowering the odds of a September interest rate hike is energy prices. Since peace talks between the U.S. and Iran ramped up in June, crude oil prices have fallen well below their recent highs.
Although fuel prices react almost immediately when energy supply shocks occur and take their sweet time adjusting lower once a supply shock abates, a substantial decline in crude oil prices has meaningfully lowered the headline inflation rate. But while this key figure is falling, a far more important inflation metric indicates that Trumpflation isn't improving. Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy expenses, has hardly budged in the wake of declining headline inflation.
It fell slightly from a nearly three-year high of 3.4% in May to 3.3% in June, and is projected by the Cleveland Fed's Inflation Nowcasting tool to hover at roughly 3.3% in July and August. Despite declining energy prices, Core PCE forecasts suggest that the effects of Trumpflation, including the president's tariffs, are hitting the broader economy and adversely impacting consumers' pocketbooks. The cost for businesses to adjust transportation routes and/or their supply chains due to the Iran war is being passed on to consumers.
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