Last week, all eyes were on the inflation data. Headlines about CPI data, released Tuesday, refueled tariff-related worries from those already inclined to see them in the pipeline. Fundstrat Head of Research Tom Lee is still not one of them.
“I think inflation is falling like a rock underneath the noise that’s coming from tariffs,” he said. That’s not to say that tariffs won’t affect consumers, however. There is a likelihood that they will cause a one-time increase in prices. Nevertheless, “tariffs are actually a tax on companies,” and taxes typically do not cause inflation.
Although stocks pulled back after the CPI release, the hammering got a little quieter the next day when core PPI came in about as benign as it gets. As Lee noted, not only was it far lower than consensus expectations, it came in at “basically zero.” As a reminder, PPI measures wholesale inflation and thus is viewed as a leading indicator of CPI.
So to recap, consumer inflation is trending below expectations, while wholesale inflation is suggesting this will continue. Lee also notes that from July to October CPI readings will benefit from easier comparisons (relative to 2024). “Put together, these establish the conditions for a dovish Fed surprise in the second half of the year,” he said.
One likely beneficiary if that surprise materializes is small-caps, a sector Lee favors that has outperformed the broader S&P 500 for the past month or so. For Head of Technical Strategy Mark Newton, this move by small-caps is further evidence that the investment environment has changed. “The texture of the market has changed a bit in the last couple weeks versus what we saw back in April, May, June. We did see a nice broadening out in late June,” he told us at our weekly research huddle.
However, “something I’m watching,” Newton told us, “is the ratio of equal-weighted discretionary versus equal-weighted staples. If discretionary is outperforming strongly, that generally means the market is in pretty good shape. When it starts to roll over and staples start to outperform and discretionary, that’s when markets can start to lag.” So what does it look like now? “For right now, the ratio is still in good shape, trending up, and it looks like we’re going to push up into August,” he said. “Based on timing, it looks like we have about another three or four weeks of gains in this.”
Chart of the Week
To Fundstrat’s Tom Lee, the real story from last week’s macroeconomic data is that for the fifth straight month, “actual, delivered core CPI came in below consensus [as shown in our Chart of the Week]. That’s what I’d call a trend, right?” he asked rhetorically. The fact that core CPI readings are consistently coming in below expectations reinforces an observation Lee has been making for some time: “I think that fundamentally, there’s a lot of people who have inflation hammers and [thus] think everything is a nail.”
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The one meaningful technical move I’m seeing today revolves around WTI Crude oil breaking its trend from early May more than two months ago. Today’s decline to multi-day lows does appear like a short-term negative unless erased by day’s end, and could drive prices down to test and break 6/24 lows at $64 in front month WTI Futures. I suspect that this should eventually happen, and lead WTI down to the high $50’s before a bottom. Key initial support under 64 lies at 60.83, and then 55.40 might seem extreme, but would represent a full 100% alternative wave projection to the initial decline from 6/23. Thus, i expect that Energy will prove to be a near-term laggard over the next two weeks, and XOP might fall to 121, OIH might reach 223, and XLE could fall to $83.75, or 82 before the start of 2H 2025 strength for WTI Crude and Energy. At present, unless immediately erased, today’s move is a short-term technical negative.
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- these figures improved to 4.4% YoY from 5.0% last month
- Dem respondent dropped from 9.3% to 7.7% and is main reason
Suggets consumers not viewing tariffs as driving a sustained rise in inflation. Overall, a decent data point