June CPI Comes In Soft
June inflation ran light. The big driver: crude oil futures fell 23% during the month, and that showed up in the data.
Headline CPI dropped 0.4% month over month, a big improvement from the prior month's rise of 0.5%, and better than the 0.1% decline that was expected. Year over year, headline CPI fell from 4.2% to 3.5%. That is 0.7 lower than the month before and 0.3 lower than what analysts predicted.
Core CPI, which strips out energy, also cooled. It was unchanged month over month and up 2.6% year over year. That counts as a big beat.
Breaking down the headline number, energy did the heavy lifting. Energy overall fell 5.7%. Energy commodities dropped 9.5%, gasoline fell 9.7%, and fuel oil fell 9.2%.
Elsewhere: food rose 0.2%, food away from home was up (roughly 0.2%), food at home up 0.2%. Shelter rose only 0.1%, a figure that feeds mostly into core. Owner's equivalent rent rose 0.2% and overall rent rose 0.1%, both good readings. Communication fell 1.5% and apparel fell 0.6%.
These numbers eased inflation fears. The dollar broke lower and the 10-year Treasury yield broke lower on the report.
One worry sits under the good news. Crude oil futures have rallied over the last two days. Energy prices depend heavily on crude, so this soft CPI reading could prove short-lived unless crude comes back down. The saving grace is that core was a strong beat too, so the cooldown is not only about oil.
What It Means for the Fed
Several Fed speakers earlier this week talked about the next move in rates being higher. This report changes that view. Inflation looks less threatening now, so those speakers face a whole new set of data. Christopher Waller, a Fed governor, made comments about rates the day before that may not age well against core inflation coming down this hard.
Fed Chair Kevin Worsh testifies for two days: the House Financial Services Committee first, then Senate Banking the next day. Expect him to lean on the phrase "task force" when politicians press him, and to keep declining to answer questions about forward expectations.
Iran, Crude, and the Strait of Hormuz
Tensions between the US and Iran are heated, with reports a naval blockade could resume. Crude at $80 would grab the market's attention. President Trump floated a 20% surcharge tied to opening the Strait of Hormuz. From a trading view, that is more rhetoric than real action. It reads as a call to arms to US allies and to countries that need oil from the strait, meant to help secure ships passing through. The US will not actually impose a 20% surcharge on boats moving through the Strait of Hormuz. The pattern: rhetoric runs hot, then negotiations start behind the scenes. For now, you trade what is in front of you, and the rhetoric is hot.
IBM's Warning Hits Software
IBM fell about 21.5% in premarket after a preliminary earnings report. This is a legacy company, low beta, low volatility, so the size of the drop stands out.
Two points from the pre-announcement. First, several large deals failed to close within the expected timelines, which raises the question of whether they will close at all. Second, the CEO said clients shifted budgets during the quarter, redirecting money that was meant for software toward buying servers and storage.
The real question traders must answer: is this an IBM-only problem, or a problem for all of software? Microsoft was already down about $12 premarket because this news hits software stocks. The whole sector will be under pressure.
There is a "baby in the bathwater" question here. Do you sell the entire sector over one company's warning? Companies that do not see IBM's problems will need to say so publicly, because until they do, they will get sold off. Microsoft's chart has already sold off substantially. If Microsoft or others come out and say IBM's trouble is IBM's alone, some of these names could bounce. Two outcomes are likely: either the whole sector sells off today, or individual names step forward and reassure investors.
One earnings miss is a thin basis for sweeping conclusions about enterprise tech spending. This is not the first time a company sold off in a single session. Super Micro, Broadcom, and Oracle have all had days like this. Software as a group has actually shown resilience, staging a decent comeback through spring and summer. Still, IBM is set for an ugly day.
Big Banks Beat, But Not All Rally
The major banks reported strong profits and strong investment banking revenue across Bank of America, JPMorgan, Citi, and Wells Fargo. The banks that did best were the ones tied to IPOs and heavy trading, plus solid net interest margin figures. It was an incredible quarter.
Some banks are not rallying despite spectacular earnings because their stocks have already run a long way into the reports. JPMorgan is an example. The options market priced an expected move of about $10 or $10.50 either way. The stock traded near $325, the downside edge of that expected move, then ticked up to about $328, keeping it in line with or inside the expected move based on options implied volatility. So the numbers are not shocking, but the bar was set extremely high, and some of these names may consolidate or drift lower.
Goldman Sachs put up spectacular numbers and traded up about $40 premarket. Five banks reported, and the message is mixed depending on each firm's mix of business. JPMorgan is a massive bank that does basically everything. Goldman is set for a good day because the strength in these earnings came from the banks' core business.
SpaceX shows the same pattern. Anything tied to that major IPO is seeing success this quarter, which fits given how large that valuation has grown.
