On Thursday, the Bureau of Labor Statistics published the Consumer Price Index (CPI): Headline inflation contracted -0.1% from May to June, hitting a 12-month low of 3%.¹ Markets responded in a way that might feel somewhat foreign to those who have been tracking it’s movements closely: Money flowed out of the so-called ‘magnificent seven’ that defined the post-COVID rally and into areas that have instead lagged so far this year. 

That rotation was profound. The biggest gainer among indices I follow for this write-up was small-caps – which just so happens to be the biggest relative laggard on that list so far this year. Perhaps most telling of all, T-bill yields fell by roughly four basis points on the week – a tiny move, but something that hasn’t happened in quite a while. Because 3-month bills are logically anchored very closely to Fed policy, that feels significant.

Thursday’s CPI also saw a 5% month-over-month drop in airline fares and a 2.5% drop in hotel rates. Both hint at an end to the biggest inflationary impacts of post-COVID travel boom that captured so much attention (and surplus spending) during The Great Reopening. However, airfares and hotel room rates aren’t single-handedly driving deflation: Collectively, they represent only around 2% of the CPI calculation.² But as a stand-in for what might be causing prices to deflate in a more general sense – namely, Fed policy – they’ll do just fine.

That makes it tempting to assume that we might finally be out of the woods as far as inflation and the Fed’s response to it are concerned. But as always, I feel compelled to inject a cautionary note: Our research suggests that it’s only after the Fed stops raising and starts cutting rates that the economy typically runs into trouble, and the specifics of this cycle have likely only served to lengthen the lags that tend to occur between Fed tightening and the demand destruction its designed to evoke. If that’s true, then the weakening of consumer demand and the cooling of the jobs market that have become increasingly obvious in recent weeks may only just be getting started, no matter what the Fed might feel emboldened to do as a follow-on to last week’s CPI data.

Almost exactly on cue, consumer sentiment dropped to an eight-month low as consumers fretted over still-high prices even as their expectations regarding the future pace of price increases remained stable.³ Meanwhile, last week’s start to second quarter earnings season wasn’t exactly reassuring: Each of the four big banks to report quarterly results last Friday easily surpassed estimates, but three of the four saw their stock prices get clocked as investors digested the trifecta of thinning margins, higher loan loss provisions, and tightening credit standards. As mentioned last week, those are the kinds of things banks usually only do when they’re worried about the health of the economy.

Besides, Friday’s Producer Price Index (PPI) felt far less controlled than the CPI release hinted on Thursday. Highlights of that report included higher-than-expected prints for both headline and core inflation, as well as an upward revision of the previous month’s data.⁴

What to watch this week

On deck this week are Goldman Sachs (Monday), Bank of America and Morgan Stanley (both Tuesday), and a pair of consumer-focused card issuers (American Express and Discover Financial) later in the week. If last week’s consumer credit release was any indication, consumers are coming to rely on credit cards to finance an increasing portion of their monthly spend.⁵ That makes any color provided by these companies critical for understanding exactly how stressed the U.S. consumer is (or isn’t) becoming.

Outside of banking, other companies expected to release results this week include a pair of airlines (United on Wednesday and Alaska Air on Thursday), as well as Dutch semiconductor capital equipment maker ASML. As a significant provider of machinery needed to produce highly sophisticated microprocessors, ASML has become another big beneficiary of AI, albeit in an arguably more tangible and fundamental way than other would-be beneficiaries. Look for comments surrounding AI-related demand as a way to triangulate trends in one of the market’s favorite growth areas.

But for a true read-through into the macro, I’d pay particular attention to trucking company JBHunt and its results on Tuesday. Longtime readers might recall that this company and its executives were the first to coin the phrase “transportation recession,” which served as a prescient warning of trouble ahead for the goods-producing sector. While manufacturing has been able to engineer a tentative recovery of sorts, trends are far from robust. If manufacturing is set for a second fall, JBHT may again catch wind of it before it appears in the macro data. Speaking of which, we’ll get two reads on the state of regional manufacturing: Empire State Manufacturing survey on Monday and the Philly Fed on Thursday.

Probably the most important piece of macro data this week will be the Census Bureau’s June retail sales release on Tuesday. Consumer demand is clearly cooling, and Tuesday’s data will likely confirm that message. While the Census data is noisy and the read-through into economic growth is less-than-perfect, investors will likely pay closer attention to this release than in the past given how central the consumer is to the current narrative.

We’ll also get our first dose of monthly housing-related data, beginning with the National Association of Homebuilder’s builder sentiment survey on Tuesday and the always-closely followed starts and permits release on Wednesday. Plus on Thursday, DR Horton – perhaps the nation’s largest builder – reports results and updates guidance. Of particular interest might be anything related to incentives and selling concessions that the company and its peers may be using to move inventory. Such incentives loomed large in recent reports from other national-scale builders in June.

Other items of potential interest include Tuesday’s industrial production and capacity utilization data, which has been trending lower since late 2022 but showed some resiliency last month. That will be followed on Wednesday by the Federal Reserve’s (The Fed) Beige Book – a collection of anecdotes from around the Federal Reserve’s 12 regions that always provides a more contextual view than that provided by other releases on the Fed’s calendar.

Finally, the Conference Board’s update of its Index of Leading Economic Indicators should be interesting given the on-again, off-again nature of its recession signal as discussed multiple times in these pages. Economists expect further deterioration of the LEI this month, but it is not likely deep enough to once again trip the trigger from expansion back to contraction. Notably, financial market variables have been successful in supporting the LEI in recent months, with the S&P’s remarkable year-to-date gain making the biggest positive contribution to the index by far. That’s not likely to have eased much given the equity market’s continued strength, so any weakness will likely be a result of deterioration in the index’s non-financial components.