US stocks fall as US-Iran tensions offset CPI relief

Reports coming in for today mention that A relatively tame inflation report brought a degree of relief to Wall Street, but failed to lift stocks amid heightened geopolitical tensions that are keeping energy costs elevated and threatening further price pressures.

In a volatile session, oil advanced as President Donald Trump stated Iran would “pay the price” for delaying negotiations for an interim peace deal, after renewed attacks overnight put further strain on a fragile truce. That kept a lid on equities and bonds despite data showing that while consumer prices accelerated, a gauge of underlying inflation rose by less than forecast.

The consumer price index advanced 4.2% from a year earlier, the most since early 2023. The core gauge, which excludes food and energy, increased 0.2% from April and 2.9% from a year earlier. Despite an energy-fueled jump in the overall CPI, the details of the report painted a milder picture, providing a welcome signal to The US central bank officials.

“Overall, while the pace of headline inflation was fuelled elevated by gasoline and energy prices, the core figures were benign — suggesting that the Fed has plenty of capacity for patience during the next several meetings,” stated Ian Lyngen at BMO Capital Markets.

With core measures suggesting more limited price increases and much of the upside coming from oil, the CPI release suggests that inflationary pressures stemming from the energy price shock have remained manageable for the US economy so far, according to Josh Jamner at ClearBridge Investments.

“Cooler core inflation is an encouraging sign for market participants, suggesting less of a need for the The US central bank to mobilize interest rates if inflationary pressures stay more contained than previously anticipated,” he stated.

The latest inflation data should give the Fed some “breathing room” to stay patient as the energy supply shock plays out, according to Angelo Kourkafas at Edward Jones. If crude prices don’t make another run elevated, inflation will likely peak this quarter and begin easing in the back half of the year, he stated.

“The near-term Fed policy outlook stays murky, with policymakers anticipated to remove their easing bias at the week ahead’s meeting,” Kourkafas noted. “Even so, we don’t expect the Fed to react quickly to what appears to be largely energy-fuelled price pressures.”

Now if the Strait of Hormuz stays disrupted through the Labor Day weekend, we would expect the energy shock to affect additional sectors and heighten uncertainty around the future path of monetary policy, according to Jeffrey Roach at LPL Financial.

“It’s very possible that things wrap up in the Middle East and shipping gets back to normal over the course of the rest of the year, in which case we can see inflation come down over time and the Fed could hold off raising rates, but if things stay as they are at present, then all bets are off,” stated Chris Zaccarelli at Northlight Asset Management.