June 12, 2025

QuickTakes

Inflation Is Chilling Down

While Middle East Is Heating Up

May's PPI inflation report, released today, was lower than expected as was May's CPI inflation report yesterday. The PPI final demand for personal consumption edged down to 2.6% y/y in May, while the CPI rose only 2.4% during the month (chart). Both suggest that May's PCED inflation rate might have dropped to 2.0%, which would finally be down to the Fed's target for this inflation rate. The Cleveland Fed's Inflation Nowcasting for PCED inflation is a bit higher at 2.3% for both May and June. Either way, the relevant data suggest that President Donald Trump's tariff hikes have yet to boost consumer price inflation as widely expected.

Furthermore, initial and continuing unemployment claims remain subdued suggesting that the labor market and the economy may be more resilient to Trump's Tariff Turmoil (TTT) than has been widely expected. In other words, the stagflation scenario remains a no-show.

In the bond market, yields continued to decline today in response to May's lower-than-expected inflation data (chart). Thankfully, the widely feared debt crisis in the US government bond market (most recently predicted by Jamie Dimon, Ray Dalio, and Elon Musk) is also a no-show. Recent Treasury auctions have been well received. Yields are down again today despite yesterday's Bloomberg report that "Hong Kong's pension fund managers have formed a preliminary plan to sell down their Treasury holdings within as soon as three months if the US loses its last recognized top credit rating, according to people familiar with the matter." That's either alarming or alarmist. We pick the second choice.

More alarming was yesterday's comment by Trump that US personnel were being moved out of the Middle East because "it could be a dangerous place," adding that the United States would not allow Iran to have a nuclear weapon. The price of oil has been heating up as Trump has been complaining about the lack of progress in negotiations with Iran (chart).

Tensions are rising after a UN agency recently declared Iran was breaching its nuclear non-proliferation obligations, and an Iranian official said it had been warned Israel was planning an attack. If nuclear negotiations fail and conflict arises with the United States, Iran will strike American bases in the region, Defense Minister Aziz Nasirzadeh said on Wednesday, days ahead of a planned sixth round of Iran-US nuclear talks.

No wonder that the price of an ounce of gold is up again today (chart). Also bullish for gold: Yesterday evening, Trump told reporters that he would send letters to trading partners in the next week or two setting unilateral tariff rates. "At a certain point, we're just going to send letters out. And I think you understand that, saying this is the deal, you can take it or leave it."

That's after, earlier in the day, Treasury Secretary Scott Bessent told Congress that it is "highly likely" that the [90-day] tariff pause would be extended for countries that are negotiating with the administration "in good faith."

TTT has been weighing on the dollar, which is yet another bullish development for gold (chart). So has chatter by vocal US billionaires about a coming US government debt crisis. We remain bullish on gold because we expect that the central banks of America's main geopolitical adversaries will continue to buy gold.

We don't expect an imminent US government debt crisis nor a bear market in the dollar. We continue to predicted that the 10-year US Treasury yield will range around 4.50% (+/-25bps) through yearend. Fears or the realization of another Middle East conflict could cause stock prices to turn choppy again, offering buying opportunities since we still expect to see the S&P 500 around 6500 by the end of the year.

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