In June, U.S. consumer prices increased. The headline Consumer Price Index (CPI) rose by 0.3% compared to May, which matched expectations. The core CPI, which excludes food and energy, went up by 0.2%, slightly lower than predicted. Year-over-year, the headline CPI climbed to 2.7% from 2.4%, while the core CPI increased to 2.9% from 2.8%. Key factors behind these changes were: – Shelter: +0.2% – Energy: +0.9% – Food: +0.3% Gasoline prices also rose by 1.0%, with various food categories experiencing increases as well. In core components, prices for household items, medical care, and personal care went up, but prices for vehicles and airline fares fell. Compared to the previous year, food prices increased by 3.0%, and energy prices decreased by 0.8%.

Core Goods CPI and Yield Curve

The core goods CPI saw a 0.7% rise, revealing inflation likely caused by tariffs. This hints at a core PCE rise of 0.35%, pending Producer Price Index (PPI) data. Despite only a slight increase in the overall CPI, inflation remains steady. The yield curve showed increases, with the two-year yield at 3.952% and the 30-year yield at 5.021%. These yield increases negatively affect the housing market. Federal Reserve members discussed economic views, stressing the importance of data before making decisions on interest rates. The inflation caused by tariffs is expected to continue into 2025. Stock markets decreased, except for the semiconductor sector, which saw gains. In the end, indices closed lower due to higher rates. The recent CPI report provided a mixed signal. Although the headline numbers appear stable, deeper economic indicators are concerning. The jump in core goods inflation, the most significant in two years, hints at ongoing tariff issues, as cautioned by Barkin. This type of inflation challenges the Federal Reserve and the bond market is reacting. Yields are rapidly returning to critical levels—around 4.5% for the 10-year and over 5.0% for the 30-year—indicating the market is reevaluating monetary policy direction.

Market Strategies and Sector Vulnerabilities

We need to change our strategy immediately. The likelihood of a rate cut in September, which had been about 50% a few weeks ago, has now dropped significantly. The CME’s FedWatch Tool shows the market now sees less than a 40% chance of a cut, a notable shift. This calls for strategies that can thrive in a “higher for longer” interest rate environment. We see value in options on Treasury futures, particularly buying puts or creating put spreads on the 10-year Note (ZN) and 30-year Bond (ZB) futures, treating recent yield lows as a strong support level. This situation is causing a split in the equity markets. While overall market rates are rising, specific sectors are benefiting. The Dow fell, but the Nasdaq rose, boosted by the easing of chip restrictions. This isn’t a time to invest indiscriminately. We believe the strategy should focus on this divergence. The PHLX Semiconductor Index (SOX) has outperformed the S&P 500 by over 15% in the last quarter, and we expect this gap to grow. Derivative traders might consider long call spreads on semiconductor ETFs like SMH to capture gains from the AI boom while minimizing costs. At the same time, we must focus on sectors vulnerable to rising rates. The increase in yields significantly impacts the housing market. The National Association of Realtors’ affordability index is at a near 40-year low. A sustained 5% 30-year mortgage rate will reduce demand, making bearish positions on homebuilder ETFs (XHB) particularly appealing. Buying puts on these sectors can effectively hedge against the rate pressures affecting the broader market. Collins’s call for being “actively patient” suggests calmness, but for the markets, it means extended uncertainty. Given that the VIX index is still low, we believe volatility is being underestimated. Purchasing affordable, longer-dated puts on the SPY or IWM is a smart move to protect portfolios against future market instability due to persistent, policy-driven inflation. Create your live VT Markets account and start trading now.

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