Yesterday’s data was viewed by many as the first monthly BLS report to capture the full impact of tariffs. The headline rose 0.3% and the data showed a 0.2% increase. The CPI data was slightly lower than Wall Street’s expectations for a 0.3% increase for both figures. Those claiming that tariffs will have a more pronounced effect on inflation can claim that goods prices were higher.
Goods are most likely to see increases due to tariffs. Moreover, they will also assert that we need to see the July and August CPI data to get a more complete picture. The graph below, courtesy of Mike Konczal, shows increases in appliances and household furnishings. However, the prices of other goods, as shown, which could be impacted by tariffs, are not appreciably changing.
Those in the camp who believe tariffs will have a minimal impact on prices will highlight service sector prices, as they account for almost 80% of CPI and are less likely to be affected by tariffs. Accordingly, the supercore CPI (core services less shelter) increased by 0.21% in June, which was in line with the historical average.
We will be listening to Fed speeches over the next week to see if the latest data changes their CPI forecasts. Nick Timiraos of the Wall Street Journal shares his view on the potential Fed reactions:
Policymakers who have forecast tariffs will lead to more meaningful price pressures later this year won’t have much reason to change that view after the June reading, particularly if retailers wait as long as possible to change prices. The June figure will just put even greater emphasis on the coming July and August numbers. By the same token, policymakers who think tariffs aren’t going to lead to meaningful inflation, because the economy and corporate pricing power isn’t robust enough to support it, have little reason to change that view after Tuesday’s report.
What To Watch Today
Earnings
Economy
Market Trading Update
Yesterday, we touched on the kick-off of earnings season, which is currently set up with a very low bar to beat. Yesterday, the major banks reported, and while earnings beat estimates, the outlook was not exceptionally strong, leading to a sell-off in the financial sector. The following is a table of the annual changes in revenue and earnings per share for (NYSE:), (NYSE:), and (NYSE:).
Despite the reduced outlook for earnings, buybacks have surged in recent weeks, supporting the recent market rise. However, we are now entering full blackout for buybacks over the next 3 weeks, which may limit some of the market’s advance in the near term.
While the market is currently bullish, sentiment among both retail and professional investors has surged to more extreme bullish levels. Fund managers, in particular, who were lagging the bull market advance, have seen the biggest three-month rise in risk appetite…ever.
With cash levels receding, the buying power to support a further advance is becoming more challenging. As Sam Stovall once proclaimed: “If everyone has bought, who is left to buy?” Such may be the case we are seeing currently.
While none of this means the market will crash, it does suggest that the risk/reward is tilting more towards risk. As such, it indeed remains prudent to rebalance risk and hedge portfolios accordingly. There will be a better opportunity to put capital to work, but that will likely be at slightly lower levels than today’s market.
Oil Rig Counts Are Plummeting: Is It A Problem?
With weak and President Trump’s “Drill Baby Drill” mantra, oil rig counts are falling. Such a correlation is expected, as the number of oil rigs typically correlates with oil prices, representing profitability for drillers. Year-to-date, the number of rigs, as reported by Baker Hughes (NASDAQ:), has declined by 9%. Therefore, one would also expect oil production in the US to fall by a similar amount. Despite what may seem obvious, oil production has only declined marginally year to date.
Often overlooked when people draw assumptions about oil production based on rig counts is the productivity of oil rigs. The graph below shows that rig counts are not far off from a 75-year low. However, the oil production per rig is steadily increasing. The productivity is the result of shale oil, which is cheaper to drill than conventional oil, and improving technology. The graph below shows that rig count productivity is soaring, helping offset the loss of production due to lower rig counts.
For example, in the first week of 2015, there were 1811 rigs. At that time, we were producing approximately 70 million barrels per day. Today, the rig count is only 537, but we are producing about 95 million barrels per day.