Market Update
The S&P 500 ended the week slightly higher, shrugging off political noise surrounding President Trump’s push to remove Fed Chair Jerome Powell. The current environment can be characterized as one with sticky but controlled inflation, steady growth, a relatively strong labor market, and oscillating sentiment. Core inflation came softer than expected, with shelter costs continuing their gradual decline, but tariffs are beginning to show up in categories like appliances and toys. On the consumer front, June retail sales rebounded, highlighting the resilience of the US consumer. Preliminary numbers for consumer sentiment in July saw sentiment rise to a five-month high, reflecting growing optimism about the economic outlook. Still, the looming impact of higher tariffs scheduled for August remains a key risk, making upcoming data critical for both the market and the Fed. Earnings season also kicked off on a strong note. Bank results exceeded expectations, although they faced a high bar heading into earnings having gained between 20-40% in the past 3 months. Meanwhile, the AI growth narrative was reinvigorated by an upbeat update from TSMC and a chip rally following the U.S. decision to ease AI chip export restrictions to China. This week we have Google, ServiceNow and Tesla reporting earnings with AI spending on top of analyst minds.
CPI – Inflation
Headline CPI rose 0.3% month-over-month (MoM) in June, pushing the year-over-year (YoY) rate to a four-month high of 2.7%, driven in part by higher energy and steady food prices. In contrast, core CPI came in softer than expected at +0.2% MoM, bringing the YoY rate to 2.9%, up slightly from 2.8% in May. Shelter inflation slowed to 0.2%, maintaining its gradual cooling trend, while vehicle prices continued to fall, new cars down 0.3% and used cars down 0.7%. However, core goods prices are beginning to reflect tariff-related pressures, rising 0.2% MoM, with notable spikes in toys, sporting goods, and electronics. Although recent weakness in categories like vehicles and apparel may have stemmed from pre-tariff inventory shifts, there's concern these could rebound, pushing inflation higher. With additional tariffs set to take effect August 1st, inflation risks are skewed to the upside.
Retail Sales
U.S. retail sales rebounded in June, but inflation-adjusted trends suggest caution. Headline sales were up 0.6% vs consensus of 0.2%, and core retail sales (ex-autos, gas, and building materials) rose 0.5% vs 0.4%, both exceeding expectations. Gains were broad-based, with 10 of 13 categories posting increases. Motor vehicle sales surprised to the upside, rising 1.2% despite expectations for weakness based on price declines in recent inflation data. Strength was also seen in building materials (+0.9%), miscellaneous retailers (+1.8%), clothing (+0.9%), and health and personal care (+0.5%). However, sales declined at department stores (-0.8%), electronics (-0.1%), and furniture stores (-0.1%). After adjusting for inflation, real core retail sales increased 0.2% in June, though the 3-month annualized trend remains weak at -0.9%, highlighting some underlying softness in consumer demand. International airfares, which feed into core PCE through foreign travel services, fell 2.2%, adding to disinflationary pressures in services.
Empire State Manufacturing Survey
The NY Fed’s Empire State Manufacturing Index surged 22 points to 5.5 in July, marking its first positive reading since February and easily beat expectations for -11.5. For reference, a reading above zero indicates expansion, while a reading below zero signifies contraction. Key components showed broad improvement: new orders jumped to 2.0 from -14.02 and shipments rose to 11.5 from -7.2, employment rose for a second month to 9.2 from 4.7, while the average workweek expanded. Input costs climbed, while selling prices dipped slightly, which could be a sign that manufacturers are paying for the tariffs as of now. Inventories also rose sharply from 0.9 to 15.6.
Sources:
https://insight.factset.com/sp-500-earnings-season-update-july-18-2025
https://www.bls.gov/news.release/cpi.nr0.htm
https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-5029616-0
https://www.newyorkfed.org/survey/empire/empiresurvey_overview
