Something Cool for Summer
Let’s dive into that that chilly CPI data, check the rate outlook now, and preview Lockheed Martin’s and RTX’s drone-busting tech.
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Cold as Ice
You never take advice
Someday you’ll pay the price, I know
I’ve seen it before, it happens all the time
You’re closing the door, you leave the world behind
You’re digging for gold, you’re throwing away
A fortune in feelings, but someday you’ll pay
– Mick Jones, Lou Gramm (Foreigner), 1977
Cold Enough?
OK, maybe not “cold as ice,” but on Wednesday morning, the data for July consumer price index as released by the Bureau of Labor Statistics was certainly “cold enough.” Financial markets traversed one potential obstacle on Wednesday when the data for July consumer prices that hit the tape landed pretty much as expected across the board. For July, headline CPI printed at +0.1% month over month and +3.4% year over year.
Those numbers were exactly what Wall Street was looking for while the annual pace of inflation cooled slightly from 3.5% for June and has cooled sharply from 4.2% back in May. Core July CPI hit the tape at +0.2% m/m and +2.5% y/y. This too, was a slowing from the 2.6% annual pace experienced in June and a 2.9% print for May.
What helped U.S. consumer-level inflation continue to slow in July? Energy, primarily. According to the BLS, gasoline prices were down 2.9% in July as fuel oil prices were 1.7% lower. Elsewhere, food away from home was down 0.1% while medical care commodities were down 0.6%. What went the wrong way? Medical care services were up 0.6% for the month of July as used vehicle prices were up 0.4%.
Very interestingly, I read Peter Boockvar’s reaction to the CPI print at Doug’s Diary on Wednesday. (I will be running Doug’s Diary the rest of the week as Doug has family matters to attend to. Peter wrote “I’m a bit confused though with the energy calculation. The BLS said gasoline prices fell 2.9% m/o/m. According to AAA, gasoline rose by 6.6% in July while diesel was up by 11%.”
Well, I hate screwy economic data, so I tend to look into things. While I don’t dispute Peter or AAA, I did do a little extra research of my own. According to the St. Louis Fed’s “FRED” database, the average price for a gallon of unleaded regular gasoline in the U.S. was $4.094 for July, down from $4.195 for June. That’s a decrease of 2.4%, so if the St. Louis Fed is accurate, the BLS data is a lot closer to being correct than is AAA. (The average price was $4.651 in May, but just $3.065 all the way back in January.)
Rate Outlook
This morning, Fed Funds Futures trading in Chicago are now pricing in a 64% probability that the Federal Open Market Committee makes no changes to short-term interest rate target ranges on Sept. 16, leaving a 36% likelihood for a quarter-percentage point rate hike. That’s down from a 51% likelihood just before the July CPI data hit the tape. Earlier this week, the likelihood, according to these markets, for a rate hike in September was as high as 67%. There is currently no price hike being priced in until Dec. 9 (72% probability). In addition, there are no price hikes being priced in beyond December 2026 at all.
Looking Ahead on Costs…
For August, the Cleveland Fed’s Center for Inflation Research and its Nowcast model is showing month-over-month CPI growth of 0.36% at the headline and 0.2% at the core. On a year-over-year basis, that would be growth of 3.36% at the headline and 2.38% at the core. While those numbers still have time to evolve, this morning traders will have to look over the July PPI data as released by the same BLS. Those numbers will confirm either a slowing of upward inflationary pressures or a likelihood for compressed margins moving forward.
Paying Attention
According to reports that have been circulating, the Iranian government has reorganized its military in order to potentially set itself up to be more aggressive abroad as talks on ending the war with the U.S. appear to be mired in stalemate. In an interview on state TV earlier this week, Mohammad Reza Naqdi, who is a general in the Islamic Revolutionary Guard Corps mentioned that “Supreme Leader” Mojtaba Khamenei had made a number of new appointments to the upper levels of that nation’s military leadership.
The general said, “Whenever the conditions are favorable and the order is issued, we must be able to take the operation into enemy territory.” He contrasted this posturing with Iran’s pre-war doctrine that was “primarily based on defense and the preservation of the country.”
Earlier this week, Pakistani Defense Minister Khawaja Asif had told Bloomberg News that the U.S. and Iran were “close to some sort of arrangement,” without giving any detail.
On the U.S. side, Pres. Donald Trump appears to be leaning more on placing increased economic pressure on the regime in Iran rather than continuing offensive operations at the pace that they had been running at. What we do know is that while the Iranian military has been beaten to the point of defenselessness and inflation in that nation has run rampant, there has been no sign of capitulation.
War Games, Drones and Upgrades…
The Wall Street Journal is reporting that in the military exercises designated as “Combined Resolve” experienced Ukrainian troops from the 412th Regiment of Unmanned Systems Forces used reconnaissance, explosive-dropping and first-person-view drones to repeatedly beat up on the U.S. Army’s 3rd Armored Brigade Combat Team, which is part of the 1st Cavalry Division.
In fact, according to the report, the Ukrainian unit eliminated U.S. vehicles in this “wargame” so rapidly that some had to be returned to the exercise, effectively “re-spawning” just to keep the scenario moving. Hey, I am an old infantry NCO. I love the infantry, but perhaps that ship has sailed or at least has to evolve.
This was no isolated incident and U.S. troops are not alone in their inability to match their training against modern drone warfare. Ukrainian drone operators have also outperformed NATO forces in similar exercises involving British, Estonian, and Swedish troops. In defense of our troops, the U.S. Army did allow that its soldiers improved during the two-week exercise. They learned to disperse and conceal equipment and make better use of electronic warfare.
We know that the Department of Defense/War has committed billions of dollars to drone development, increased electronic warfare capabilities and counter-drone technology. That last one is huge. Both Lockheed Martin (LMT) and RTX (RTX) are close to delivering high-power microwave driven anti-drone systems to the U.S. military.
The Lockheed system relies upon a ground-launched, reusable airborne microwave drone itself, designed to neutralize more than 50 enemy drones at a time by frying their circuit boards. The RTX system is a phaser-driven microwave, intended to track and drop single drones individually or target massed swarms at the speed of light. I am long both of these names. Basically, we take drones off of the battlefield, we restore our traditional advantage.
Economics (All Times Eastern)
08:30 – Initial Jobless Claims (Weekly): Expecting 200K, Last 199K.
08:30 – Continuing Claims (Weekly): Last 1.801M.
08:30 – PPI (July): Expecting 0.1% m/m, Last -0.3% m/m.
08:30 – Core PPI (July): Expecting 0.2% m/m, Last 0.2% m/m.
08:30 – PPI (July): Expecting 5.0% y/y, Last 5.5% y/y.
08:30 – Core PPI (July): Expecting 4.6% y/y, Last 4.7% y/y.
10:30 – Natural Gas Inventories (Weekly): Last +33B cf.
1:00 p.m. – U.S. Thirty-Year Bond Auction: $25B.
The Fed (All Times Eastern)
08:15 – Speaker: Cleveland Fed Pres. Beth Hammack.
08:40 – Speaker: Richmond Fed Pres. Tom Barkin.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: BIRK (.76), ONDS (-.07)
After the Close: AMAT (3.39)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long LMT, RTX equity.
