Lots to consider this week (underneath the headlines) in terms of data, the Fed, geopolitics, yada yada.
Thus, this weekend's macro analysis will be robust.
In the meantime, the following note will bring you up to speed.
Two Cool Prints, and the Variable That Could Undo Them*
The Data
For the second month running, the inflation data came in below what markets feared.
Wednesday's consumer price index rose 0.1% on the month and 3.4% year over year, easing from 3.5% in June. Core CPI — stripping out food and energy — advanced 0.2%. Both figures landed in line with consensus.
This morning's producer price index was better than in line. Headline PPI was unchanged in July against expectations for a 0.2% increase, and June's reading was revised to a decline of 0.1% from a previously reported drop of 0.3%. Core PPI rose 0.2% versus a 0.3% forecast. On an annual basis, headline producer prices ran 4.7% and core 4.2%, meaningful step-downs from June's 5.5% and 4.7% respectively.
Weekly jobless claims for the period ended August 8 came in at 209,000, an increase of 9,000, with the four-week moving average holding steady at 199,000. Labor markets remain historically tight by that measure, even after last week's surprisingly weak July payrolls report showed a decline of 23,000 jobs against expectations for a gain of 85,000.
Taken together: two consecutive months of cooling price data alongside a labor market that is sending mixed but not alarming signals.
What's Underneath
We would encourage some caution before declaring the inflation problem resolved.
The July producer price relief came overwhelmingly from energy. Final demand goods prices fell 0.7% on the month, with energy down 3.1% and gasoline off 5.7%. Food prices declined 0.9%. Core goods, by contrast, rose 0.1% — a small increase, but an increase.
That matters because July's energy prices are not August's energy prices. Crude has since retraced a good deal of its July decline, and the disinflation that flatters these reports is precisely the component most vulnerable to reversal.
The services side deserves a second look as well. Final demand services rose a modest 0.2%, but that figure was helped by a 6.5% jump in portfolio management fees — a category that routinely posts outsized gains in the first month of a quarter for reporting reasons, and one that essentially reflects the rise in asset prices rather than any underlying cost pressure. Meanwhile, core PPI excluding trade services — arguably the cleanest read on genuine underlying producer inflation — rose 0.4%.
So the report contains two contradictory signals depending on which cut you privilege. The headline says relief. The stickiest core measure says pressure persists. Reasonable people will read this report in opposite directions, and we suspect they will.
The Federal Reserve's Narrowing Path
Rate expectations have swung violently this summer. In late July, with Brent crude crossing $100 a barrel, futures markets briefly assigned roughly an 82% probability to a September rate increase. Following Chair Warsh's press conference after the July meeting — at which the committee held rates at 3.50%–3.75% over three dissents favoring a hike, the first time in a decade three officials have dissented in the same direction — that figure fell to around 60%. By earlier this week it had settled near a coin flip. It has moved lower again on the back of the last two days' data.
Goldman Sachs suggested this morning that most committee members would want to see the August inflation reports before committing to a September move. Deutsche Bank's read was that two consecutive encouraging core prints combined with softer employment data leave less pressure to act immediately.
The ten-year Treasury yield eased to roughly 4.67%.
We would characterize the situation this way: the Fed has been handed a reprieve, not a resolution. The committee is genuinely divided — the dissent pattern makes that plain — and the arguments on both sides have merit. A central bank facing 3.4% inflation and a labor market showing its first real cracks in two years is a central bank with no comfortable option.
The Story Fewer People Are Watching
While American investors have been focused on domestic inflation, something consequential has been building in Japan.
Reports this morning indicate that Prime Minister Takaichi's government supports a near-term rate increase from the Bank of Japan, with the next move likely in September or October. The summary of opinions from the BoJ's July meeting showed at least three of nine board members arguing for a faster pace of tightening than the roughly two increases per year the bank has been delivering. Japan's own producer price index ran 7.2% year over year in July, and the yen-based import price index was up 29.1%.
The yen, meanwhile, sits near 159 to the dollar, not far from the 160 level that has historically prompted official intervention. Japan and the United States conducted a record coordinated yen-buying operation at the end of July, when the currency reached 40-year lows — and then declined to follow up, allowing roughly half of that move to retrace.
Why does this matter to a U.S.-based investor? Because Japan has spent three decades as the world's reservoir of cheap capital. Japanese institutions and households exported enormous savings abroad in search of yield they could not find at home, and that capital has helped finance asset prices everywhere, including here. A Bank of Japan that normalizes policy in earnest — with domestic bond yields at levels not seen in decades — creates a genuine reason for that capital to come home.
That process, if it happens, will not announce itself in a single headline. But it is among the more consequential slow-moving forces in global markets, and it is currently underpriced relative to the attention paid to the next Fed meeting.
The Wild Card
The Strait of Hormuz remains the variable capable of undoing the disinflation narrative in a matter of weeks.
Talks aimed at reopening the waterway appear deadlocked. Iran's position is that the U.S. naval blockade must lift first, with additional demands around sanctions relief attached. Washington's public posture has hardened. Brent trades near $88.
The number worth holding onto is this: ship-tracking data indicated somewhere between eight and 15 vessels transited the strait on each of August 4, 5, and 6, against roughly 130 daily transits before the conflict began in late February. Physical flows remain a small fraction of normal.
We have argued for months that a ceasefire and a physically reopened waterway are two distinct events, and that markets have periodically conflated them. That distinction continues to hold. It also means that the energy-driven price relief showing up in the July data rests on a foundation that could shift quickly in either direction.
Where This Leaves Us
Gold has now held above $4,400 an ounce for four consecutive sessions, up nearly 10% over the past month. Central bank demand remains a structural support — China's central bank added roughly 20 tonnes in July, its 21st consecutive month of purchases, and global central banks bought an estimated 289 tonnes in the second quarter.
That last data point is, in our view, the most durable signal in this week's news flow. Central banks are not trading a September FOMC meeting. They are making multi-decade reserve decisions, and they have been making the same one, month after month, for nearly two years.
The near-term picture is genuinely better than it was two weeks ago. Inflation is cooling, the Fed's hand is less forced, and equity markets are appropriately reflecting both. We are not inclined to argue with that.
We are inclined to remember that the improvement is largely energy-driven, that the energy situation remains unresolved, and that the deeper structural shifts — in Japanese monetary policy, in central bank reserve composition, in global energy routing — are operating on timelines that don't much care what happens in September.
Portfolios built for those timelines are the ones we're comfortable holding through whatever the next two months produce.
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This commentary is provided for informational and educational purposes only and does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation regarding any security, sector, or investment strategy. The views expressed reflect the opinions of Private Wealth Advisors as of the date written and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. Past performance is not indicative of future results, and all investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as personalized investment, tax, or legal advice.
*The section titled "Two Cool Prints" was drafted with the assistance of artificial intelligence tools under the direction and editorial review of Marty Mazorra, Chief Investment Officer of Private Wealth Advisors. All analysis, conclusions, and final content are his own.
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