Tariffs Not Affecting Inflation?

Equities were mixed as inflation reports confounded market pundits last week.

While CPI did rise in June, it wasn't due to tariffs. The key areas affected by higher tariffs - Apparel, Motor Vehicle Parts & Maintenance, and New Vehicles - were only slightly higher or down. Energy costs were the key driver for the +0.3% June increase. When it comes to PPI, it doesn't appear that producers saw much change in their costs due to tariffs, as the June number came in at 0.0%. Back in May, the CEO of The Home Depot stated on the company's quarterly earnings call that they were not going to pass along any rising costs due to tariffs. To top things off, the number of mentions of inflation in S&P 500 transcripts of earnings calls has reached a 4-year low.

Meanwhile, economic fundamentals aren't pointed to an imminent recession yet.

For instance, both Industrial Production and Manufacturing Production surprised to the upside this week. Industrial Production came in at +0.3%, with only +0.1% expected. Manufacturing Production was expected to be flat at 0.0%, but was positive at +0.1% and last month's number was revised higher at +0.3% from the original +0.1%. Manufacturer's New Orders shows economic expansion, not deceleration typically associated with a recession. While it's early in the corporate earnings season, with only 12% of S&P 500 companies having reported, 83% are beating earnings estimates. The Chicago Fed's National Financial Conditions Index shows continued loosening of financial conditions, which means there's no immediate threat to economic growth. As we enter the Dog Days of Summer, expect some softness in equity performance which is typically associated with this time of year.

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