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WAR & PEACE & INFLATION: CPI, SMALL BUSINESS SENTIMENT

Investors began their Tuesday with many distractions: a slew of big bank earnings, a flare-up of U.S.-Iran hostilities over the control of a certain waterway (reviving inflation concerns in the bargain), and Kevin Warsh's first day of Congressional testimony as Fed Chair.

Top it off with a cooler-than-expected CPI report.

The Labor Department's Consumer Price Index (CPI) USCPI=ECI, which tracks the prices urban consumers pay for a basket of goods and services, fell by 0.4% in June, marking a stark reversal from May's 0.5% increase and cooler than the -0.1% consensus.

Year-over-year, CPI posted a 3.5% increase, a deceleration from the prior month's 4.2% and 0.3 percentage points south of the 3.8% growth analysts expected.

Core CPI, which strips out volatile food and energy prices and is often referred to as "underlying inflation," printed on monthly and annual bases at 0.0% and 2.6%, respectively, both cooler than economists predicted.

It's the second take on June inflation, after the uptick in hourly wage growth reported on July 2.

"This (report) is a bit of a surprise," Peter Cardillo, chief market economist at Spartan Capital Securities, tells Reuters. "And with Mr. Warsh headed to Capitol Hill this morning, today's numbers might just give him some leeway to express some hope that inflation remains contained."

Line-by-line, a 5.7% monthly drop in energy prices and the consequent 9.7% decrease at the gasoline pump are welcome developments for the American consumer. Even so, prices at the pump remain 26.7% higher than a year ago.

Transportation costs fell by 2.5%, but are up 6.5% year-on-year. While the cost of an airline ticket rose by a mere 0.2%, it has shot up by 26.5% in the last 12 months. Food prices cooled down to 0.2%.

The cost of shelter rose by 0.1% from May and services were unchanged. Year-on-year, the two metrics—closely watched by the Fed—are up 3.3% and 3.2%, respectively. Both categories continue to coast well north of annual core inflation.

"Today’s better-than-expected core reading gives the Fed breathing room in deciding whether and when to raise interest rates,” says Kathy Bostjancic, chief economist at Nationwide. “That said, the renewed escalation of conflict in the Middle East and announced reimposition of a U.S. blockade has prompted a sharp reversal in oil and gasoline prices that introduces upside risk to our forecast."

Changing gears, the dour mood among small business owners in the U.S. has lifted a bit this month, according to the National Federation of Independent Business (NFIB).

NFIB's Optimism Index USOPIN=ECI rose 2.1 points to 97.4, falling just shy of its 52-year average of 98, driven by improved expectations for business conditions and real sales.

The Uncertainty Index cooled two points to 89, but remained well above 68, its long-term average.

Inflation concerns ticked higher, once again becoming the top worry. An increasing share of respondents reported raising selling prices, but on a forward basis, those planning near-term price hikes inched lower.

After inflation, the most important problems are labor quality and taxes, running neck-and-neck.

"(The) NFIB survey was good news in the narrow sense that the headline index rose a bit," writes Carl Weinberg, chief economist at High Frequency Economics. "But the details ... show persistent upward pressure on prices, widespread labor shortages."

"For the Fed, price increases are as widespread as they have been since early 2023," Weinberg adds. "Business conditions are, overall, not so good."

As a reminder, the NFIB is a politically active membership organization whose PAC skews heavily Republican, according to the Center for Responsive Politics/opensecrets.org.

(Stephen Culp)

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EARLIER ON LIVE MARKETS:

MAIN US INDEXES RISE AS COOLING INFLATION OFFSETS SOFTWARE-SECTOR WEAKNESS CLICK HERE

S&P 500 FUTURES SLIGHTLY GREEN AFTER COOL CPI CLICK HERE

HALF-TIME IN EUROPE: LOOKING TOUGH CLICK HERE

NOT JUST ABOUT OIL, REMEMBER GAS CLICK HERE

GOLDILOCKS RETURNS TO EUROPE, BUT OIL'S THE SPOILER CLICK HERE

BROAD-BASED LOSSES DRAG STOXX 600 LOWER CLICK HERE

BEFORE THE BELL: EUROPE SOFT AS US KICKS OFF EARNINGS SEASON CLICK HERE

FED IN THE SPOTLIGHT AS WARSH FACES CONGRESS CLICK HERE