It wasn't difficult to predict that this week's July inflation data would be cooler. Last month, oil declined on the unfounded hopes of peace in the Middle East. That showed up in the numbers, but what about next month and beyond?

 

Oil is trading at $80-$82 a barrel. That is up more than $4 from July 1, 2026, or almost 5.5 percent. As such, I expect the August Consumer Price Index and the Producer Price Index to be higher than the results reported for July. And what happens if the Straits remain closed? Could we see $85, $90, or higher for a barrel of West Texas crude?

 

Nothing the Trump administration has tried has succeeded in unlocking the stalemate over the Straits of Hormuz. Intelligence assessments over the last few weeks indicate that without boots on the ground, the Navy could not open the Straits on its own. A land invasion would be difficult, if not impossible, and the severe loss of life unacceptable.

 

So, both sides are now playing a waiting game. The U.S. is applying continued economic pressure to Iran, hoping to force the hardline leadership to cave. The Iranians, long accustomed to economic pressure from the West, seem undeterred and have developed ways to grow their economy despite sanctions.

 

The regime has also become more entrenched thanks to the invasion. Rather than accede, they are content to use delaying tactics at the negotiating table while demonstrating their ability to strike militarily whenever they want. They know that the longer oil prices remain where they are or higher, the more likely it is that winning the mid-term elections will be difficult for Trump and the Republican Party. That could lead Congress to force an end to the war.

 

Given this background, why haven't we seen even higher oil prices? One reason is that oil demand is declining according to both OPEC and the International Energy Agency. The other reason could be that more oil is making its way out of the region than is reported. By some estimates, as much as 16 million barrels per day is making its way either through the Straits or through regional pipelines. That compares with approximately 20 million bbl. per day before the conflict.

 

Understandably, the U.S. financial markets have lost faith with constant U.S. assurances that a deal is right around the corner. We are in the ‘show me or shut up' stage of the war. Until there is a definitive opening of the Straits with tankers traveling through the passage at a pace like before the U.S. attack, the oil price will remain higher. How high that risk premium will go is at this point up to the Iranians.

 

The new CPI reading of 2.5 percent, higher than the inflation rate last year at this time but only a monthly gain of 0.2 percent from June's number, was in line with my forecasts. It seems clear to me that Wednesday's numbers were leaked. All the asset classes that would benefit from a weaker CPI number were up substantially well before the 8:30 a.m. data release.

 

The Producer Price Index was unchanged from June. From here, inflation moves higher in my opinion. As for the string of good inflation numbers we have had lately, I suspect the data will not sway the Fed members from their watch-and-wait stance.

 

Kevin Warsh, the new chairman of the central bank, has already said, "I do not find the current Fed policy of ‘data dependence' of much real value. We should care little about two numbers to the right of the decimal point in the latest government release." However, the June data should put to rest any fears that we will see a rate hike at the next meeting in September.

 

On a side note, readers who agree with my misgivings about the accuracy and leaking of government data should note that U.S. jobs numbers have been revised lower in 21 of the last 30 months by a total of minus-1.05 million jobs. This means an average of minus-35,067 jobs have been revised out of previously reported data each month over this period. June and May jobs numbers alone were revised down by a total of minus-103,000, the largest two-month downward revision since July 2025. It makes me doubt the trustworthiness of government data.

 

Stocks continued to climb higher on the back of the inflation data. As bets on an interest rate hike fall well below 50 percent, animal spirits are revving up, and many Wall Street strategists are talking about 8.000 as the next stop on the S&P 500 Index. Next week we could see some further consolidation before another run higher. I would buy the dip if we had a more substantial sell-off.

 

In an effort to reduce the growing expense of our nation's healthcare, Congress and the administration have cut or reduced benefits in program after program over the last year. The question they fail to answer is an important one. If health benefits are reduced, who ends up paying for all those who cannot afford it? The short answer is we, the taxpayers, do.

 

The relentless government cuts continue. In the last two weeks alone, the administration ended subsidies for Medicare drug premiums, which could impact millions of older Americans next year. At the same time, the president insisted that RFK Jr. reduce vaccinations, based on an unfounded autism link, even while U.S. cases of measles hit highs not seen since 1991.

 

Those are just two examples of a poorly understood effort to rein in burgeoning healthcare costs while expanding spending in other areas, like the proposed $1.5 trillion defense budget for 2027. Earlier this year, the Congressional Budget Office, which is Congress's official nonpartisan economic and budget agency, is forecasting a dramatic reduction in healthcare coverage not only this year but out into 2030.

 

Readers might recall the change in the Affordable Care Act (ACA) rules passed by the Republican-controlled Congress at the urging of President Trump. As part of the law H.R. 1, enhanced premium tax credits for coverage were reduced substantially. Depending on how much the insured earned, premiums for Obamacare could have doubled. As a result, more than 3 million fewer people (13 percent) signed up for health plans.

 

For those who faced these sudden charges, there was nothing beautiful about the One Big Beautiful Bill Act. Since then, there has been a concerted effort to cut even more government spending, leaving the states to pick up the slack. Between 2025 and the end of the Trump presidency, the number of people with ACA premium tax credits will fall from 20.9 million to 9.7 million (a 54 percent drop). If Congress and the White House continue along this path, the CBO projects that ACA health coverage options will drop by 44 percent between now and 2032.

 

To the uninitiated, this might sound like a great way to reduce government spending, which could be used elsewhere to reduce the deficit, for example. I only wish that were true. A look at what happens to those with no health insurance might change that view.

 

Let's say Joey, with a family of four, caught a steel splinter in his eye because of a part-time work accident. He has no insurance because he can't afford it. Joey uses eyewash, compresses, and whatever else he can muster, but the condition gets worse over the next few weeks. When it goes so bad that he misses work, he goes to the emergency room at the urging of his pregnant wife. By then, what could have been a simple procedure now requires major surgery to save the eye. The hospital bill is more than he makes all year. What happens?

 

A recent New York Times article, "Uninsured Patients Rise Sharply, Hospitals Report, Citing Obamacare Cuts," explains it all. The gist of the article is that more uninsured patients are showing up in hospitals and clinics nationwide. This is costing hospitals hundreds of millions of dollars. Any guess what the hospitals will do in an effort not to go bankrupt — raise prices.

 

I don't have to tell you that companies and individuals who have healthcare insurance are already faced with rising healthcare costs on what seems like a daily basis. What will Joey's dilemma mean to you and/or your company? You will be footing the bill for Joey's eye operation. Now, imagine the cost of another 30 million adults and children in this country who are uninsured. Those who will delay and delay until minor health issues become major and major issues become deadly.

 

Next week, I will tabulate the costs to taxpayers from those who are uninsured as well as who will be most impacted. To make matters worse, there are further reductions right around the corner that will throw even more Americans into the uninsured minefield.

 

The U.S. economy shed 23,000 jobs in July. The forecasts were for a gain of 80,000. Some workers appeared despondent while investors were ebullient as the weaker data signaled less reason for the Fed to hike interest rates.

 

Employment figures for May and June were also revised lower, with a combined 103,000 job losses more than previously reported. Readers who have read my two-part columns on government data have been forewarned to take government numbers with a grain of salt.

 

It was a somewhat dismal report where the participation rate fell to 61.4 percent; it's the lowest since September 2021. The labor force participation rate measures the percentage of the civilian population age 16 and older that is either actively working or actively looking for work.

 

It is one of the best measures of the economy's labor supply. From the data, it appears clear that the labor pool is shrinking. In which case, employers must compete harder for workers, wages rise, and that can keep wage inflation elevated.

 

In any case, the 50+ percent expectations of an interest rate hike in September in the betting markets dropped immediately with the data release. Bond yields fell, along with the dollar, and guess what skyrocketed? Precious metals.

 

That's right, gold and silver are back from the dead! This week, gold rose 7.7  percent while silver notched an 11.6 percentgain. For the most part, gold has been trading in a range for months. As oil prices gained, gold lost value. Silver fared even worse. Add in the rise in interest rates and the dollar (both kryptonite for precious metals), and it was close to a perfect storm for that asset class.

 

Now we seem to be reversing those trends, at least in the short-term. The Fed is on hold or appears to be for now, given that the last two Consumer Price Index CPI) reports have been benign. A third CPI report next Wednesday, August 12th, looks to be weaker as well. Weaker inflation numbers and now weaker job data put rate hikes on hold and may even push yields and the dollar even lower.

 

In addition, Mainland China is hoping to establish Hong Kong as a major trading market for gold among other metals. Remember, gold is entirely outside the global credit system. It cannot be frozen, sanctioned, or inflated away by another government's choices. Russia knew that and amassed its own holdings before it invaded Ukraine.

 

The People's Bank of China has been building up physical gold inventories in Hong Kong over the past several months after launching its Precious Metals Central Clearing Company. In June, they added 14.93 tons of gold. That's their single largest purchase since 2023.

 

I suspect this is adding upward pressure to the price of precious metals. They have slowly been moving their own substantial gold holdings (2,346 tons) from where it is kept in the London Metals Exchange back home to support their efforts in Hong Kong. Bottom line, Beijing is stocking the exchange it built rather than deepening the one its geopolitical rivals dominate.

 

My fears that August would turn out to be a month to be cautious seem ill-advised as we close out the first week. My caution has and will continue to be dependent on the conflict in the Middle East. In the meantime, the rotation back into technology continues. However, it is not at the expense of other areas.

 

The three major averages had healthy gains to finish the week, with the NASDAQ the winner, up 4.90 percent. The S&P 500 and small-cap Russell indexes each gained more than 3 percent while the Dow finished just shy of that.

 

Earnings results were the lynchpin of these moves. It also helped that we have seen a 9 percent decline in the price of oil. The hope that the U.S. will somehow negotiate a successful opening of the Straits of Hormuz was the flavor of the week. This could change next week; otherwise, the S&P 500 Index seems destined to make a record high.

 

As if food prices aren't high enough, climate scientists around the world are concluding that the October-December El Niño period this year could see numerous droughts, floods, and other climate catastrophes. If so, the impact on the supply of agricultural commodities could be serious.

 

There have been 20 El Niños recorded over the past 75 years. For those who don't know, this climate pattern occurs when unusually warm sea surface temperatures spread across the central and eastern Pacific Ocean. This causes a shift in global weather patterns that affects different regions in different ways. Some areas experience heavy rains while others wither under severe droughts.

 

Right now, more than half of England is already in a drought. Overall, as we watch and read about record heat in Europe and forest fires in France and Spain, something even more insidious is occurring in the Pacific Ocean. Scientists are already recording above-average sea surface temperatures for this time of the year (2.0 degrees above average). The tropical Pacific is warmer right now than at any time over the 45 years of satellite record keeping.

 

Consensus forecasts from scientists indicate this year's El Niño will peak at 3.6 degrees Celsius above normal. The record over 149 years of data is at most 2.75 degrees, which was set in 2015-2016. Throughout its history, only six El Niños reached the level of severity expected for this year's event.

 

Some are already calling it the "Super El Niño," which is expected to peak sometime this fall, at the very time of South America's planting season. As you might imagine, the weather could cause severe disruptions to planting cycles and to the harvest of food crops, including sugar, wheat, corn, soybeans, coffee, cocoa, and more.

 

How serious could it become? Back in 1877, the middle of the Pacific Ocean was hotter than anyone could recall. Rain did not come to India, Brazil, or China that year. The soil dried up as crops failed across five continents. Millions died, and it came down to governments deciding who starved and who ate. Fast forward to modern days.

 

You may remember the great run on the world's cocoa crop caused by El Niño a few years ago. The Ivory Coast, where 38% of the crop is grown, was deluged by heavy rains and extreme heat. Insects swarmed destroying the rest. Cocoa prices soared, hitting a record $10.97 a kilo in April 2024. That particular El Niño ranked fifth in modern record keeping. This one forming now is presently ranking number one.

 

In past El Niño events, wheat production in Australia fell dramatically and could again fall by 20-60 percent if drought becomes a factor. The same could be said for corn in Brazil, coffee in Vietnam, sugar in India, Thailand and Brazil, and grain supplies globally.

 

Compounding the weather threat is the impact of climate change, plus two wars at the same time, all of it disrupting the global food production system. The Strait of Hormuz has been shut to commercial traffic for five months. Aside from oil, much of the world's fertilizer production has also been choked off in the Strait, while Europe burns and crops wither. Russia and Ukraine together represent about 27-30 percent of the world's wheat crop. As their war drags on, both countries are aiming their missiles and drones at each other's wheat exports.

 

By this time, I think you are getting the picture. If there is a silver lining to this potential dark cloud, it is that El Niño may help grain production in the U.S. Warmer-than-normal weather conditions are expected across North America, which could benefit the growing cycle. At the same time, El Niño conditions might suppress Atlantic Ocean hurricanes. If farmers do not run out of fertilizer, the country could act as a buffer for grain markets worldwide, especially for corn and soybeans.

 

There is also a chance that between now and September, weather patterns change and the force of El Niño dissipates, along with rising temperatures in the Pacific waters. It is getting late in the day for that to occur, however. There could also be an end to Trump's war, and to the other war he promised to end on day one of his second term. If not, I expect that come winter, and just in time for the midterms, consumers will once again be hit with surging food prices on top of what we are already paying.

 

Late in the week after a further drubbing, the technology sector staged a rebound from a deeply oversold position. How long it lasts and how far it will go is debatable. In the meantime, long-dated yields in the bond world continue to rise.

 

You can blame the Fed for the continued backup in interest rates. Kevin Warsh's second FOMC meeting has come and gone with a big nothing done when it came to interest rate policy. He argued that the financial markets are doing the heavy lifting right now, and that is all right with him.

 

I could have entitled this column "Bond Vigilantes Ride Again" because that is exactly what the Fed chair is counting on. Readers haven't heard me mention these fixed income traders recently. This is the name markets give those who buy and sell bonds based on their forecasts for economic growth, inflation and geopolitics. Under the last Fed chair, Jerome Powell, the central bank bent over backward to inform the markets of what it was thinking and doing before it did it.

 

Those days are over. Chairman Warsh is determined to pull back on communication. Instead, he prefers to keep his cards close and watch how markets digest the ongoing data. Right now, the vigilantes are convinced that, thanks to the Iran war, tariffs, and government spending, inflation, after a month or two of reprieve, is set to rise again.

 

If that's the verdict, why then did the Fed not simply raise interest rates at this meeting? For one thing, if the once-again spike in oil prices is fueling higher inflation expectations, how would raising interest rates change that? It wouldn't, nor would higher rates reduce the impact of Trump tariffs. Those are supply issues. In inflationary times, the Fed is focused on reducing demand for money by making borrowing costs higher via hikes in interest rates.

 

Remember, too, the Fed's bailiwick is the Fed funds rate, that is a short-term debt instrument. Raising that rate might impact the yields on short-term borrowing costs. It has little impact on longer-term maturities where all the corporate, mortgage, and auto loans occur. That's where the private sector comes in.

 

By the end of the FOMC Q&A session, the markets were left with uncertainty. There was no hint at a September hike, no guidance on what the FOMC members are thinking, only the assurance that inflation was too high. If you think about it, the Fed has been on hold for five meetings in a row and yet bond yields have risen substantially without them.

 

Markets were miffed with the outcome. While Warsh asserted the Fed's commitment in pursuing its 2 percent inflation target, he repeatedly declined to connect that commitment to any concrete action. As a result, traders took the indexes down hard and bond yields higher. To be fair, some of the sell-off at the end of the day on Wednesday was due to one fund manager who was forced to liquidate his holdings in many AI stocks after suffering steep losses over the last few weeks.

 

On the macroeconomic front, the first reading of second quarter GDP growth came in at 1.5 percent below the forecast of 2 percent. Weak, yes, but with the questionable accuracy of government data, traders ignored the result, preferring to wait for further revisions. The Fed's favorite inflation index, the Personal Consumer Expenditures Index (PCE) for June, was cooler. That was thanks to the decline in oil prices, but with oil back up, investors ignored that data point, expecting higher numbers this month and next.

 

Second-quarter earnings continue to separate the wheat from the chaff. Microsoft gave an upside surprise, while Meta did the opposite. Apple disappointed. Amazon gained 15 percent on its results. I did warn that investors would become more discriminating based on individual company results. That is what is happening.

 

As I counseled readers last week, August should see further volatility in the markets. We are already seeing that. Wednesday, the S&P 500 Index fell almost 1.5 percent; Thursday it gained back more than that. Friday it failed to follow through to the upside. While the week was volatile, the index ended essentially flat. The same could be said for the Nasdaq, although volatility was more than twice that of the other indexes.

 

Last week I wrote that I was watching two levels: "the first stop on the S&P would be 7,300 (testing a double bottom). If that fails to hold, we are looking at 7,200 (cycle lows). Technology would have an even bigger decline." The low this week was 7,313. From there it bounced, and we are once again back above 7,400.

 

I also explained there was a second alternative. "The S&P 500 Index, supported by the rotation I have discussed previously (that is out of tech and into sectors like healthcare, utilities, industrials, etc.), could remain at this 7,400 level." We did that as well. All in one week!