We ended the week in equities on a sour note as Israel’s preemptive strikes on Iran’s nuclear and military targets raised fears of a broader regional conflict. Oil prices spiked on the news as there is the potential for supply disruptions (and higher prices) as the Strait of Hormuz becomes a choke point for tanker deliveries.
The fear for the broader stock and bond markets is that this ongoing conflict escalates and keeps oil prices elevated for a long enough period that inflation numbers begin to trend higher. If that happens, then interest rates will go higher and the consumer will get squeezed so that is a new risk to the US markets.
More Inflation Data
Fortunately, we got inflation data with the Consumer Price Index (retail prices) and the Producer Price Index (wholesale prices) which look a bit high but stable at these levels (near 2.5%). If oil prices are persistently above $70 then we should expect these inflation measures to trend higher which would be bad for the consumer.
The CPI data showed milder-than-expected inflation in May, with a 0.1% monthly rise and a 2.4% annual increase, driven by shelter and food but tempered by falling energy and goods prices. Core CPI remained stable at 2.8% annually. Overall, the data suggested limited immediate tariff impact on prices.
The May PPI data indicated mild wholesale inflation, with a 0.1% monthly increase in final demand prices and a 2.6% annual rise, aligning with expectations. Core PPI also showed subdued growth at 0.1% M/M and 3.0% Y/Y, suggesting limited immediate tariff impacts on producer prices. Services and goods saw modest gains, with some sector-specific volatility (e.g., metals up, jet fuel down). Overall, inflationary pressures appeared contained, supporting a stable economic outlook ahead of potential tariff-related disruptions.
The S&P 500 – Two Timeframes
As you can see on the far right the last candlestick is slightly red so this was a slightly negative week for stocks. Given how much the stocks have rebounded since April, we may be due for a modest pullback to the 5700 area or down 6%.
Upward momentum has also waned in the past couple of weeks and if we zoom into the daily prices in the chart below, we have pushed into overbought conditions the RSI indicator. Also, filling the gap in the chart wouldn’t be out of the ordinary.
If the conflict with Israel/Iran spirals into a broader conflict then oil will be well bid to say the least. So, oil prices will be a significant point of interest for all markets in the coming trading sessions.
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