Sarge Stocks Rocket Higher, Fed Chair Looks Wobbly, Inflation's Not So Hot

It's no secret that I don't think Jerome Powell has done a very good job as Fed Chair for some time now. I can be as biased as the next guy or gal, though I try not to be publicly political or let politics seep into my decision making. I forgave Powell and the entire Federal Open Market Committee for their "transitory" expectations for consumer-level inflation in the face of pandemic-era supply chain bottlenecks. I had to. For as an economist, as I have admitted, I shared those expectations. To take shots at him or them for making an error that I made myself would be hypocritical.

I never forgave him or them, though, for what I saw as breaking with more than a century's worth of precedent and attempting to put a thumb on the scales of a national election through the implementation of changes made to monetary policy ahead of said election. His own stated targets had not been met, yet aggressive cuts to short-term interest rates ahead of the 2024 presidential were made. No Fed Chair had ever done anything that could so brazenly be interpreted as political.

I could see why he could be. Then former Pres. Trump had been very rough on Powell after nominating him to the Fed Chair after taking office in 2017. Powell, a registered Republican, had been appointed to the Fed's Board of Governors by Pres. Barack Obama in December 2011. There appeared, on Thursday, to be some confusion on X on who appointed Powell to the Fed.

We fast-forward to the present. Powell, after being nominated for the top spot at the central bank by Pres. Trump, had been renominated by Pres. Biden. Powell has been resistant to cut short-term rates in 2025, despite what have appeared to be more favorable economic conditions for doing so than existed in 2024, while the overall economy has started to show some cracks.

Powell may or may not be a lot of things. One thing he certainly has not been is data dependent. Not that his thought process is completely without merit. The president's policy on trade with most of the planet has been intentionally inconsistent. That is obviously by design. Negotiating in that way, however, has provided Powell with cover, should Powell continue to be slow to act.

No one can argue that to this point, the implementation of new tariffs on virtually all U.S. trading partners has been a surprising success. I say "surprising" because few economists expected the inflationary impact of tariffs to lag their implementation so significantly. Nor did very many economists realize the shot in the arm that these tariffs would provide to a fiscally strapped U.S. Treasury.

Will President Trump do the Deed?

Financial markets reacted negatively on Wednesday as rumors spread up and down Wall Street that Powell was possibly being fired and being fired soon. Pres. Trump was quick to pull back from those expectations, "I don't rule anything out, but I think it's highly unlikely, unless he has to leave for fraud." 

Hmm, interesting. Powell's current term as Fed Chair ends on May 15, 2026. His term at the Fed's Board of Governors ends on Jan. 31, 2028.

Even if replaced as Chair in May, Powell could in theory, stick around and influence policy, as he would likely have loyalists among his colleagues into 2028. On Wednesday, the rumors started after a senior White House official (who?) told Barron's that the president was likely to fire Powell soon. In pulling back from that rumor, the president did allow that he had discussed the possibility with Republican legislators.

The Situation Gets Hairy

Earlier this month, Bill Pulte, director of the Federal Housing Finance Agency called for Fed Chair Jerome Powell to be investigated by Congress, alleging that Powell's recent testimony about cost overruns at the central bank's headquarters was deceptive. Last week, Russell Vought, Office of Management and Budget director, sent a letter to Powell criticizing him for those cost overruns, while also accusing him of misleading Congress.

The Fed has denied these allegations. The Fed claims that renovations to its two buildings in Washington are designed to reduce costs over time by consolidating operations. These renovations were approved by the Fed's Board in 2017 and were priced at $1.9 billion in 2019. Apparently, at last check, the cost of these renovations has already surpassed $2.5 billion and may be as high as $2.7 billion. While the Fed is being accused of including unnecessary luxuries in the work, the central bank is defending itself by blaming the overruns on finding more problems with the property than had been anticipated once the work had begun.

Interesting Inflation Numbers

On Wednesday morning, the June producer price index hit the tape colder than an ice cube, one day after the June consumer price index had crossed that tape a tad on the warm side. How interesting. While we had gone through the CPI and illustrated how the upward pressure on consumer level inflation had largely been in energy, which is non-core and across the service sector. Oddly, while there was consumer level inflation, it was fairly clear that it was not being driven by tariffs, at least not yet.

Well, allowing that May PPI data was revised upward from what had printed originally, meaning that there was month-over-month producer-level inflation for that month, there was no producer-level inflation whatsoever in June. At the headline, producer-level inflation landed at growth of 0.0% month-over-month and at the core, producer level-inflation printed at growth of 0.0%. On a year-over-year basis, headline producer prices dropped from annual growth of 2.6% in May to growth of 2.3% in June. At the core, producer prices dropped from year-over-year growth of 3.0% to growth of 2.6%.

Obviously, tariffs are not impacting producers and wholesalers in the aggregate. Were consumer prices higher because retailers were playing the public, hiding behind perceived upward pressure created by tariffs that either will not or certainly have not yet materialized? Or were retailers (much more likely) reacting in June to the upward revision to May PPI that we were unaware of until Wednesday. Either way, the impact of tariffs on inflation was largely invisible in June.

In other macroeconomic news, June industrial production ramped to its best month at growth of 0.3% in June since February, while capacity utilization improved to 77.6% in June from 77.5% in May. The Atlanta Fed did not revise its GDPNow model for the second quarter after those numbers were released but will do so later this morning after June Retail Sales hit the tape.

Powell Allies Speak Up

On Thursday, Atlanta Fed Pres. Raphael Bostic appeared on the Claman Countdown at Fox Business with Liz Claman. Bostic said, "This most recent CPI... headline number moved away (from target). If you just look from May to June, we saw the highest prices we've seen all year." 

Bostic added, "I've come to the view that it may be several months more, maybe into 2026, before we see the full effect" of tariffs on consumer level inflation. Fortunately, Atlanta does not vote on policy again until 2027.

Later, New York Fed Pres. John Williams, who has never impressed me with his quick wit nor his acumen as an economist, spoke before the New York Association for Business Economics. Williams said: "Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year." 

Williams holds a seat with permanent voting rights on policy at the FOMC.

As I have mentioned many times, these underdeveloped models at the Fed do not include assumptions for changed consumer behavior nor changed behaviors for cross border trade, which is ridiculous. I did not hear either of these regional Fed presidents (though I missed parts of their appearances) either man mention the annualized CPI of just 1.8% since January when leadership and policies changed in Washington. After Waller and Bowman have taken the other side of this issue with cautious support for cutting rates sooner coming from Goolsbee, Musalem and Daly, one thing is clear. This is not just Trump versus Powell. The FOMC is breaking up into factions.

Markets Roar?

"Roar" seems a bit strong. Financial markets were strong on Wednesday. The Sarge-folio roared, but that's because I am in the stocks that are currently and have been (thankfully) hot as heck. The S&P 500 gained 0.32% for the day as the Nasdaq Composite gained just 0.25%. But small caps outperformed the broader market with the Russell 2000, up 0.99% and the S&P 600 up 0.68%.

Among Sarge-names, Rocket Lab RKLB was up an additional 6.9%, while Kratos KTOS was up 6.2% and Advanced Micro Devices AMD was up 2.9%. In all, seven of the 29 active long positions in the Sarge-folio made 52-week highs on Wednesday.

As Treasury yields dropped (Because Trump backed away from firing Powell or because he still might fire Powell?), ten of the 11 S&P sector SPDRs closed out the Wednesday session in the green. Health Care XLV and the REITs XLRE led the winners, which might not be a market positive, while Energy XLE was the lone market loser.

Breath was solid. Winners beat losers by a 3-to-2 margin at the NYSE and by about 2 to 1 at the Nasdaq. Advancing volume took a 76.2% share of composite Nasdaq-listed trade and a 62% share of composite NYSE-listed activity. More importantly, aggregate trade increased on a day over day basis across NYSE-listings, Nasdaq-listings and across the membership of the S&P 500.

So, is that meaningful? All of the major indexes higher on winning splits, positive breadth, and increased trading volume? You bet your tail this was meaningful. The bullish trend continues, reconfirmed anew.

Economics 

(All Times Eastern)

08:30 - Initial Jobless Claims (Weekly): Expecting 230K, Last 227K.

08:30 - Continuing Claims (Weekly): Last 1.965M.

08:30 - Retail Sales (Jun): Expecting 0.1% m/m, Last -0.9% m/m.

08:30 - Core Retail Sales (Jun): Expecting 0.3% m/m, Last -0.3% m/m.

08:30 - Import Prices (Jun): Expecting 0.2% m/m, Last 0.0% m/m.

08:30 - Export Prices (Jun): Expecting -0.1% m/m, Last -0.9% m/m.

08:30 - Philadelphia Fed Manufacturing Index (Jul): Expecting -1, Last -4.

10:00 - Business Inventories (May): Expecting 0.1% m/m, Last 0.0% m/m.

10:00 - NAHB Housing Market Index (Jul): Expecting 32, Last 32.

10:30 - Natural Gas Inventories (Weekly): Last +53B cf.

4:00 p.m. - Net Long-Term TIC Flows (Weekly): Last $-7.8B.

The Fed 

(All Times Eastern)

10:00 - Speaker: Reserve Board Gov. Adriana Kugler.

1:30 p.m. - Speaker: Reserve Board Gov. Lisa Cook.

6:30 - Speaker: Reserve Board Gov. Christopher Waller.

Today's Earnings Highlights

(Consensus EPS Expectations)

Before the Open: ABT (1.26), CTAS (1.07), GE (1.40), PEP (2.03), USB (1.07)

After the Close: NFLX (7.08), WAL (2.01)

At the time of publication, Guilfoyle was long GE, RKLB, KTOS, AMD equity.