Daily Commentary

MarketMinder’s View: The UK’s consumer price index (CPI) rose 2.8% y/y in May, unchanged from April’s inflation rate and below analysts’ expectations for 3.0%, though it is worth noting that the Office for National Statistics’ (ONS’) preferred gauge is CPIH (which includes owner-occupiers’ housing costs). This measure rose 3.0% y/y, matching April’s pace. In any case, UK prices’ cooling in May is likely to be short lived. As the article sensibly notes, UK energy regulator Ofgem’s energy price cap, which limits what suppliers can charge for power, is set to rise a whopping 13% later this summer, when it finally incorporates the Iran war’s higher energy prices. Looking at the underlying, the war’s economic effects remained prevalent in May: “Britain’s Office for National Statistics [ONS] said Wednesday that transport had been the biggest contributor to rising prices in May, partially offset by falling food and non-alcoholic drink prices. Surging prices of air fares, which were up 10.3% month-on-month, as well as motor fuel and sea fares lifted transportation costs for Britons in May, the ONS said.” This is all backward-looking, mind you, so nothing is new or surprising here for stocks. But the cap’s expiration will likely add some upward pressure to UK price measures in the months ahead—worth being aware of before headlines start warning about the potential fallout.

MarketMinder’s View: Is US oil supply in trouble? This article worries America’s recent tapping of its Strategic Petroleum Reserve (SPR) may be cause for concern. “According to federal data released Monday, US officials released another 8.9 million barrels from the SPR last week alone. That leaves the US emergency oil reserve with 340.3 million barrels of crude, taking out the prior low set in July 2023 under President Joe Biden after Russia invaded Ukraine.” The implication here is that running down the SPR buffer could send US energy prices higher, hence the warnings near the end here. Yet these are false fears, for a couple of reasons. First, US oil supply isn’t dangerously low. As we covered last week, America still has around 50 days’ worth of supply between commercial inventories and the SPR—near the low end historically, but not the supply crisis some are suggesting. Even if production somehow froze (which looks unlikely), the US economy has leeway, especially given ample commercial stocks. Which brings us to our second point: Production isn’t frozen. Reality is closer to the opposite: Today’s high prices are incentivizing producers—in the US and abroad—to ramp up to meet consumer demand. Friends, this is how markets work. Producers and consumers respond to price signals. Hence, similar to how they responded during 2022’s Ukraine war-related oil supply shock, we reckon US producers will continue ramping production, which likely keeps prices rangebound. Persistent energy worries are a false fear—a sign stocks’ wall of worry remains bullishly high.

MarketMinder’s View: Americans continued defying “tapped out consumer” fears in May, as retail sales rose 0.9% m/m. A major caveat here, though, as sales data aren’t inflation adjusted and “receipts at gas stations advanced 3.4%, helping lift the headline figure as pump prices climbed in May due to the Iran war.” Still, stripping these out, retail sales rose a solid 0.7% m/m on broad-based strength. Looking across the board, “Eleven of 13 categories posted increases. Motor vehicle sales rebounded by 1.2%, the biggest advance in almost a year, while spending at online retailers rose for a fifth straight month.” Spending at restaurants and bars fell -0.1% m/m—maybe reflecting some tightening of purse strings—but one month isn’t a trend and this category grew 0.9% m/m in April. Overall, we think this was a solid report that suggests long-running US consumer worries, which have flared up recently alongside rising gas prices, remain off base. We continue monitoring consumer spending, but three consecutive months of strong retail spending are evidence Americans are holding up despite the Iran war’s downstream economic effects.