Inflation cooled, oil heated up
Is U.S. inflation dropping?
U.S. inflation finally dipped lower. The June Consumer Price Index fell by 0.4% on the month, the annual rate dropped to 3.5% from 4.2%, and core eased to 2.6%, all better than expected. Wholesale prices fell too. But there is a catch: the improvement came mostly from energy. Gasoline fell nearly 10% in June, the month the peace deal briefly held and oil collapsed. That world no longer exists. The U.S. has been carrying out strikes on Iran over consecutive nights, President Trump is floating a blockade, and oil is climbing.
The bond market noticed. The 30-year yield held above 5%, near its highest since before the financial crisis, even as stocks cheered the news. Equities are trading on June’s inflation. Bonds are trading on July’s oil.
Which sectors are performing well this earnings season?
Earnings season opened strongly, but the reactions split cleanly. Goldman jumped 8%, Morgan Stanley blew past estimates, and BlackRock had its best day in over a year. The banks got paid.
The chips did not. ASML (a Dutch company that makes machines that build microchips) raised its guidance for the second time this year, but the sector sold off anyway, with Micron (a U.S. semiconductor company) down 9%. Thursday, TSMC (Taiwan Semiconductor Manufacturing Company) grew earnings by 77%, yet its shares fell by 4%, dragging semiconductors with it. Twice in three days, a dominant chip company delivered great numbers, and its shares dropped.
SpaceX completed the round trip, closing below its $135 initial-public-offering price for the first time after touching $225 in June. We called that stock the test of appetite for richly priced growth. The verdict is in. None of this is about fundamentals, it is about price. The market keeps rewarding good news at reasonable multiples and taxing it at rich ones.
Why did the Bank of Canada hold its interest rate?
The Bank of Canada (BoC) held its policy rate at 2.25% for a sixth time. The interesting part was the tone; growth has resumed, with the second quarter tracking near 2.5% (annualized) after two negative quarters. Inflation excluding gasoline sits at 2.2%, with core near 2%. And the April threat of consecutive hikes is no longer part of the discussion.
However, BoC Governor Tiff Macklem kept the option alive, saying the BoC will not let oil become persistent inflation. But the statement read pretty neutral; it’s easy to see it either way. Markets now see the BoC on hold into 2027, and the U.S. Federal Reserve (the Fed) is likely to have hikes. In Macklem’s own words, the dilemma is resolving itself.
How will oil affect the markets?
Earnings accelerate from here into big tech. The swing variable for all of it is oil. It manufactured June’s disinflation, it feeds the Fed’s hike math and it decides whether Macklem’s forecast will survive. After a week when the data said a rate cut was needed, but the stock market said otherwise, the question is, which one is the blip: June’s cooling or July’s barrels?
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
