US equities fell as hotter headline inflation and renewed geopolitical risk over the Strait of Hormuz outweighed a softer core reading. The Dow Jones Industrial Average dropped about 1.2%, a near 600-point slide, ending just under 50,250 after hitting roughly 50,150; the move marked its sharpest daily fall since a record close near 51,400 and came despite May CPI broadly matching forecasts. Headline CPI rose 0.5% MoM and 4.2% YoY, the highest annual rate since April 2023 versus 2.4% in January, while energy jumped almost 4% MoM and accounted for over 60% of the increase; gasoline was up roughly 40% YoY. Core CPI printed 0.2% MoM against expectations near 0.3%, with the annual core rate at 2.9%, and core goods prices fell as tariff pass-through eased. WTI traded back near $90 as Brent pushed towards $93.
The Federal Reserve meets next week and is priced to hold, with focus on whether a year-end hike is possible as UoM inflation expectations approach 5% and the 1-year measure last stood at 4.8%. Thursday’s 12:30 GMT May PPI is forecast at 0.7% MoM after 1.4% in April, with the annual rate near 6.4%, while core PPI is seen around 0.5% MoM and 5.4% YoY; jobless claims are expected near 219K versus 225K. Technically, the Dow remains above the 50-day EMA near 49,700 after rising from around 45,000 in April, but it failed to hold a recovery from near 50,350, stalled short of 50,800, and closed weak after opening just shy of 50,900. Levels cited include 50,750 and 50,900 on the upside, while a close under 50,150 targets 50,000 and then 49,700.
Geopolitical Risks and the Resurgence of Volatility
The market is telling us to ignore the polite details and focus on the main threat. Even though core inflation came in soft, the Dow still saw its sharpest fall in weeks because geopolitical risk is back in charge. The friendly economic data is providing no support, meaning we should position for what is actually moving the price: the conflict.
Our focus is on the price of oil and what it means for the market. With West Texas Intermediate crude back near $90 a barrel and reports that maritime insurance premiums for Hormuz passage have tripled in the last 48 hours, the energy tax is real and growing. This situation directly threatens any forecast that assumes inflation will cool off later this year.
This environment is built for higher volatility. The CBOE Volatility Index (VIX), which sat near 14 last week, has already pushed above 18, and we believe it has further to run if tensions don’t ease immediately. We see buying VIX call options with a 22 or 25 strike price expiring in July as a direct and effective way to hedge against, or profit from, a sharp increase in market fear.
Positioning for Risk: Equity and Economic Data
For a directional bias, we are buying put options on the DJIA, targeting levels below the current market. A decisive break of 50,150 opens the door to the psychologically important 50,000 level and the 50-day moving average around 49,700. We view these puts as necessary protection against a market that is clearly valuing war risk over economic data.
Just this morning, the May Producer Price Index figures confirmed our caution, coming in hotter than expected at a 0.8% month-over-month increase. This pipeline pressure from energy costs effectively ties the Federal Reserve’s hands ahead of its meeting next week. There will be no monetary cushion for the market if oil prices continue to climb.
The final piece of data we are watching for this week is tomorrow’s University of Michigan consumer sentiment survey. The household inflation expectations number, last at 4.8%, is crucial as we approach levels not seen since the high-inflation era of the early 1980s. A print at or above 5% would reinforce the Fed’s hawkish stance and add further downside pressure on equities.
