Economic Seesaw: Inflation Up, Spending Down

Is the global trade war heating up, or has President Trump positioned America to make itself great again?

Despite his bluster and penchant for causing angst among enemies and allies alike, Trump’s tactics seem to be working.

China seems ready to negotiate on trade, while Europe seems to have conceded on increasing military spending to support NATO.

In contrast to most politicians, he’s a man of action (and tweets) – not just empty promises, regardless of the feathers he ruffles.

Trade worries will likely lead to more volatility in the markets.

But don’t forget about the inflationary pressures creeping into the equation.

Creeping Inflation

The U.S. Labor Department released the June producer price index on Wednesday.

Headline inflation came in at 0.3% on the month, topping the consensus estimate of 0.2%. Year over year, wholesale prices climbed by 3.4%. That’s an acceleration from last month’s 3.1% increase.

Excluding food and energy, producer prices ticked up 0.3% on the month, in line with expectations. For the year, inflation came in at 2.8%, up from 2.6% in May.

The market doesn’t pay as much attention to wholesale prices as consumer prices. However, these increases eventually will be passed on to the consumer.

The June consumer price index (CPI) showed signs that some pricing pressures have started to filter through.

CPI inched higher in June, but the headline rise of 0.1% fell short of expectations for a 0.2% increase.

Core prices, which exclude food and energy, ticked up 0.2%. On a year-over-year basis, consumer inflation came in at 2.3%, slightly higher than the consensus estimate of 2.2%.

Spending Slows

On the surface, retail sales improved in the month of June, with overall spending matching expectations for a 0.5% increase.

Last month’s headline and core (excluding auto and gas sales) figures were also revised 62.5% higher.

However, core retail sales ticked up by a measly 0.3%, falling short of the consensus forecast for a 0.5% increase.

Auto sales held up well during the month. Maybe consumers were trying to get a leg up on potential tariffs.

Personal care and building materials also fared well last month. Clothing, sporting goods, and general retail merchandise were down sharply.

Retail sales account for half of consumer spending, which accounts for two-thirds of the U.S. economy. The Federal Reserve and the markets pay close attention to trends in spending.

Bottom Line: Inflation has finally entered the picture, which should make the Fed happy about its actions up to this point.

But as last week’s jobs report showed, wage inflation remains muted.

The Market in 3 Sentences

The escalating trade war between the U.S. and China has made market participants cautious, contributing to the flattening yield curve.

On the plus side, corporate earnings are healthy, manufacturing is in full gear, consumers are still spending at a pretty good clip, and, if trade issues are ironed out, we could see a real bounce in long-term yields.

All this adds up to potential volatility Treasury markets, so be ready for the next trading opportunity!

You can prepare for and profit from surprises in the financial markets with Treasury Profits Accelerator.

Happy trading to you