US retail sales for July increased by 0.5%, meeting expectations and following a revised 0.9% rise in June. Import prices also rose by 0.4%, higher than expected, amidst concerns over tariffs. Meanwhile, the University of Michigan consumer sentiment index fell short of expectations at 58.6, while inflation expectations increased, with the 1-year outlook at 4.9% and the 5-year at 3.9%.
Federal Reserve rate cut expectations for September have declined, dropping to 84% after being at 100% earlier in the week. Fed officials have expressed caution amid mixed inflation data, especially from the service sector. US yields rose, with the 2-year yield at 3.752% and the 30-year yield at 4.921%.
Presidential Meeting In Alaska
In the backdrop of these economic updates, President Trump and President Putin are meeting in Alaska, seeking peace discussions involving Ukraine. US stocks closed mixed, with the Dow rising by 34.86 points, while the S&P and NASDAQ declined. Crude oil prices fell in anticipation of a peaceful resolution between Russia and Ukraine.
Upcoming events include Fed Chair Powell’s speech at the Jackson Hole Symposium and New Zealand’s expected rate cut, with further economic indicators set to release throughout the week.
The meeting between Trump and Putin is creating significant event risk, with crude oil already falling on hopes of a deal. We have to be cautious, as a breakdown in talks could cause a sharp reversal in risk assets and a spike in energy prices. We remember how the VIX volatility index surged from around 20 to over 35 in early 2022, so buying protection through index puts or oil calls is a sensible move.
Market Concerns About Inflation
With the hot 0.9% PPI print and rising inflation expectations, the market has correctly reduced the odds of a September rate cut to 84%. All eyes are now on Fed Chair Powell’s speech at Jackson Hole, which historically can be a major market-moving event. We recall his hawkish tone in August 2022 that triggered a sharp sell-off, so we should be positioned for potential volatility in both bond and equity markets.
The rise in the 10-year yield to 4.319% reflects real concern that inflation is becoming sticky again, especially with import prices rising. While July’s retail sales were solid, the dismal consumer sentiment reading of 58.6 suggests this strength may not last. This divergence warrants caution before making any long-term bullish bets on the consumer.
