Last week’s U.S. macroeconomic data was, to say the least, disappointing for the markets, though not yet for the S&P 500 or Nasdaq. As now-former Federal Reserve Chair Jerome Powell warned, the conflict in the Middle East, or more precisely the resulting rise in oil prices, is driving inflation.
CPI rose 0.6% from the previous month, in line with expectations, while core inflation increased 0.4%, above the projected 0.3%. On an annual basis, the CPI stood at 3.8% versus the expected 3.7%, while core inflation reached 2.8%, slightly above the forecast of 2.7%.
Producer inflation was even worse. The PPI surged 6% year-over-year versus expectations of 4.8%, while monthly growth stood at 1.4%, well above the forecast of 0.5%. Core PPI also surprised on the upside, rising 5.2% year-over-year versus the expected 4.3%, and 1% month-over-month versus forecasts of 0.3%.
At this point, hopes that the Fed will cut rates this year basically vanished. More than that, CME FedWatch now shows around a 40% chance of another rate hike.
Against this backdrop, the bond market came under pressure toward the end of the week. Yields on U.S. Treasuries rose to their highest level in a year, while German Bund yields reached levels not seen since 2011. In the UK, political developments may also have contributed to the pressure.
Still, calling this a full-blown debt crisis might be premature, as tensions in the Middle East ease, inflationary pressures could ease, and markets could stabilize quickly.
The problem is that, despite optimistic posts on Truth Social, the situation around the Strait of Hormuz has hardly improved; if anything, it has worsened, with Trump threatening to “annihilate” the country, while Israel openly states that the operation is far from over.
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