Anticipation: Still Waiting for the Big One

Is tariff-driven inflation just delayed—or dodged? The latest CPI print leaves us guessing.

 

KEY TAKEAWAYS

• Markets are stuck in anticipation mode, not reacting strongly to either good or bad news.
• CPI came in lower than expected, at 0.1% versus the 0.2% forecast.
• Shelter inflation is gradually fading, while goods inflation ticked up modestly.
• Tariffs may still impact inflation, but the effects haven't shown up significantly—yet.
• The Fed remains in wait-and-see mode, comforted by a still-healthy labor market.

MY HOT TAKES

• Markets are bracing for disaster, not celebrating calm.
•  Lower CPI didn't move the needle because bad news is now expected.
•  Tariff impact may be delayed—not absent.
•  The Fed is hiding under the umbrella of a strong labor market.
• We're not out of danger—just in a lull between storms.
• You can quote me: “Even the most optimistic of us are simply waiting for numbers that show we’re heading toward an Old Testament-like disaster.”

 

Anticipation. Making you late? Keeping you waiting? 1971 was a different time when Carly Simon penned those now-famous lyrics. We often use the word to describe the feeling of suspense that precedes something good. In Simon’s case, she was rumored to be waiting for her then-boyfriend Cat Stevens. Was she waiting for love? Was he simply late for date night? We may never know, but the song has been part of America’s hit parade these many years.

 

So what is the market anticipating these days? What is that thing beyond the horizon? Well, I have to say in this case, the market seems to be anticipating something not good–something bad. Traders have been cautiously optimistic after the President indicated a willingness to negotiate with trade partners after markets cratered in the wake of sweeping tariffs. The rally that followed brought stock indexes very near to break-even. However, the momentum has fallen short of propelling stocks to new highs.

 

Why is that? Well, the easy answer would be a “trade deal” (intentional use of quotes). If you want to sound more like a pro, you could say something like “earnings growth to justify multiple expansion.” No. That can all be swept into the category of just plain good news. Ya, sure we want to get along with our trading partners, and… um really… earnings growth is always appreciated. Those are expected, and if they don’t arrive, well, you know.

 

But there is something else, and I have been trying to put my finger on it, and yesterday’s Consumer Price Index / CPI shed some important light on my internal debate. I gave you a rather lengthy discourse on CPI on Tuesday. I told you that Goods Prices were on the climb, and that it was primarily those prices that would be affected by tariffs. The final message? Watch those closely. Yesterday morning came and the CPI flashed across the tape–a would-be harbinger of economic cataclysm.

 

The giant asteroid–the one that has the Fed hunkered down in a bunker below the Eccles Building (Fed HQ) in DC–grew larger and larger as it approached. The last one like it literally wiped out the dinosaurs, relegating the once apex predator on the planet to museum bone piles and kids cartoons. But then it happened. No giant plume of fire and ash. No shock wave. Nothing. The asteroid simply passed by the planet; it missed.

 

CPI came in lower than expected! Economists were expecting monthly price increases to be 0.2%, but they only grew by 0.1%, which was even lower than May’s print. Was there a celebration? No. In fact there was… well, disappointment. Why? Well, let’s look at the numbers more closely to see if there were some hidden clues.

 

We will start with the king of sticky inflation, Shelter Cost. That grew at 2.1% year over year, but it disinflated from the prior month as it has been quite literally since peaking in June of 2022, albeit on a really shallow trajectory, but it is fading nonetheless. Aha, let’s take my own advice from Tuesday and look at Goods Inflation. Well, goods inflation did pick up from 0.13% to 0.28%. Was this caused by tariffs or just strong demand? Is an annual growth number like that even anything to worry about? It’s below the Fed’s target, so probably not. It is growing and it may have been caused by tariffs, but it is still really… not bad at all.

 

I have made this observation recently on not just the CPI release, but even more broadly. It seems that even the most optimistic of us are all simply waiting for numbers that show that we are heading toward an Old Testament-like disaster, but those numbers have not come yet. We are left this morning, still waiting. 

 

Could it be that companies have decided to eat the costs of tariffs? Are companies working through their pre-tariff inventories? Maybe. Maybe there will be no recognizable effects. Or maybe, like an asteroid that just missed the Earth, it is now in a wide orbit that will bring it right onto our heads the next time it’s in our neighborhood. Traders seem to be waiting for bad news, but it hasn’t come yet.The Fed, however, can continue to shelter itself under the comfort of what appears to be a healthy-ish labor market with an asteroid impact imminent. Stay tuned. There is more than one asteroid out there.

 

YESTERDAY’S MARKETS

Stocks broke a three-day winning streak yesterday despite would-be positive news on the trade front. Stocks responded to news of a trade framework with China with an underwhelmed “meh,” as the scarce details that emerged showed that the pact lacked teeth. A better-than-expected inflation report was jam packed with… nothing really, prompting traders to fall back on caution. 

 

NEXT UP

• Producer Price Index / PPI (May) is expected to have climbed by 0.2% for the month after declining in April by -0.5%. That brings the year-over-year number to 2.6% from the prior period’s 2.4%. This is a leading indicator for yesterday’s Consumer Price Index / CPI.
• Initial Jobless Claims (Jun 7) is expected to come in at 242k, slightly lower than last week’s 247k claims.
• The Treasury will auction $22 billion 30-year Bonds, traders will be watching demand closely at this pivotal yield inflection point.
• Important earnings today: Adobe and RH.

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