Underlying inflation rose in May less than forecast for the fourth month in a row, suggesting companies are largely holding back on passing higher tariff costs through to consumers.
The prevailing narrative is that companies massively increased inventories before the tariffs were enacted and firms are now working off these stores, hoping to replenish supplies at later date when tariff fears subside and prices fall back to earlier pre-tariff prices..
How realistic is this view? Are most setting themselves up for failure, reliving the supply shocks of five years ago?
Short dated Treasuries rallied on the data and interest rate swaps now are suggesting a 75% probability the Fed will lower borrowing costs in September and two reductions may occur by year’s end. The yield curve steepened by over 6 bps.
Speaking of Treasuries, the $39 billion ten-year Treasury auction was regarded as “solid.” Today $22 billion of the 30-year Treasury are auctioned.
Legendary bond investor Jeffrey Gundlach warned “American debt burden and interest expense have become untenable,” meaning that Treasuries are no longer seen as a legitimate risk-free investment. Gundlach further stated “there is an awareness that the long-term Treasury is not a legitimate flight to quality asset.”
Commenting about equites, the NASDAQ declined about 0.50% while the Dow was unchanged as the markets are waiting for more tariff deals.
Oil advanced almost 5% on rising Mid East tensions as Iran threatened to target US military bases in the region if hostilities break out.
England issued a warning to ships in the Persian Gulf, Strait of Hormuz and the Gulf of Oman of increased activity by the Iranian Navy. The US has also “authorized the voluntary departure” of troop dependents from some locations in the Middle East on rising tensions including the Iraqi Embassy.
The PPI is released at 8:30. Will the data be similar to the CPI?
Last night the foreign markets were down. London was down 0.12%, Paris down 0.71% and Frankfurt down 1.06%. China was up 0.01%, Japan down 0.65% and Hang Seng down 1.36%.
Futures are down about 0.5% ahead of the PPI, the 30-year Treasury auction and trade concerns. The 10-year is up 10/32 to yield 4.38%.
