Tag: Inflation

Inflation Holds at 3.4% as Energy Costs Surge, Complicating the Fed’s Next Move

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U.S. inflation remained stubbornly elevated in August as a sharp increase in energy prices pushed consumer costs higher, adding another complication for the Federal Reserve ahead of next week’s policy meeting.

The Consumer Price Index rose 0.4% in August, accelerating from a 0.1% increase in July, according to the Bureau of Labor Statistics. Over the past 12 months, consumer prices were up 3.4%, unchanged from July and still well above the Federal Reserve’s 2% inflation target.

Energy was the clearest source of pressure. The gasoline index climbed 3.9% during August and accounted for more than one-third of the overall monthly CPI increase, while the broader energy index rose 2.1%. Compared with a year earlier, energy prices were up 16.3% and gasoline prices had surged 27.4%.

That jump comes as oil markets have been repeatedly disrupted by escalating conflict in the Middle East, where restrictions on shipping and threats to energy infrastructure have pushed crude prices sharply higher. The effects are now becoming increasingly visible in the inflation data.

Energy Reverses July’s Inflation Relief

The August reading represents a meaningful shift from the previous month. Energy prices had fallen 1.5% in July, helping limit the overall CPI increase to just 0.1%. Gasoline declined 2.9% that month. By August, both trends had reversed sharply as renewed geopolitical risk began filtering through commodity and retail fuel markets.

Gasoline’s 3.9% monthly increase was the largest single contributor to August inflation, but other petroleum-related costs are also showing pressure. Producer-price data released Thursday showed diesel fuel prices jumping 24.1% in August, accounting for nearly two-thirds of the increase in processed goods for intermediate demand. Prices for jet fuel, gasoline, heating oil and crude petroleum also moved higher.

That matters because energy can affect inflation well beyond what consumers pay at the gas station. Higher diesel and jet-fuel costs can raise shipping, airline and logistics expenses, while elevated crude prices increase input costs for products ranging from plastics and chemicals to packaging and agriculture. In other words, an energy shock can begin as a relatively concentrated increase in gasoline prices and gradually spread through a much wider portion of the economy if it persists.

Core Inflation Is Cooler, But Not Gone

The picture looks somewhat better when volatile food and energy prices are removed. Core CPI rose 0.3% in August and was up 2.4% from a year earlier, easing from 2.5% in July. That suggests underlying inflation remains considerably more contained than the headline number and much closer to the Federal Reserve’s target.

Shelter, however, remains an important source of ongoing inflation. Housing costs increased 0.3% during August and were 3.0% higher than a year ago. Airline fares were another standout, rising 23.4% over the past 12 months, while food prices rose 0.1% in August and 2.7% over the year. There were offsets. Medical-care prices declined 0.2% during the month, motor vehicle insurance fell 0.8%, and apparel and recreation prices were unchanged.

Taken together, the report suggests that the current inflation problem is increasingly uneven. Many underlying categories have cooled significantly from the inflationary surge of recent years, but energy has emerged again as a powerful external source of price pressure.

Why CPI Matters So Much for Interest Rates

Inflation reports are among the most closely watched economic releases because they directly influence expectations for Federal Reserve policy. The Fed’s primary tool for fighting inflation is interest rates. Higher rates increase the cost of borrowing, which can cool demand for homes, cars, business investment and other interest-sensitive spending. Weaker demand can eventually reduce businesses’ ability to raise prices and bring inflation lower.

That relationship is one reason financial markets can react sharply to CPI reports. A hotter-than-expected inflation reading can lead investors to anticipate higher rates or fewer rate cuts, often pushing Treasury yields higher and creating pressure on rate-sensitive assets. Softer inflation can produce the opposite reaction.

August’s report is particularly important because it is the final major inflation reading ahead of the Federal Reserve’s September 15-16 meeting. The challenge for policymakers is that headline inflation has been pushed upward by an energy shock that monetary policy cannot directly control. Raising interest rates cannot reopen shipping lanes or increase oil production. But if higher energy prices begin spreading into wages, transportation, goods and services, the Fed may have less room to look through the increase.

An Uncomfortable Combination for Consumers

For households, the August report highlights why headline inflation still matters even when economists often focus on core inflation. Consumers cannot simply exclude food and energy from their budgets.

A 27.4% year-over-year increase in gasoline prices can have an immediate effect on disposable income, particularly for commuters and lower-income households. Higher fuel prices can also eventually show up in airfare, shipping charges and goods delivered by truck.

The latest inflation numbers are also arriving at a time when wage growth has become less supportive. Recent data show wage growth trailing inflation, which means purchasing power can deteriorate even if the overall inflation rate is far below the extremes reached earlier in the decade. That helps explain why consumers can continue to feel significant affordability pressure even when economists describe inflation as having moderated.

Inflation measures the rate at which prices are increasing — not whether prices have returned to previous levels. Once prices rise, a lower inflation rate simply means they are increasing more slowly.

Oil Could Determine What Happens Next

The trajectory of inflation over the next several months may depend increasingly on what happens in energy markets. If Middle East tensions ease and crude prices retreat, gasoline and transportation costs could reverse relatively quickly, removing a major source of headline inflation. That would allow the longer-running moderation in core inflation to become more visible.

If oil prices remain elevated or rise further, however, the economic consequences become broader. Gasoline has already accounted for more than one-third of the August monthly CPI increase. Continued increases in diesel, jet fuel and crude prices could gradually push transportation and production costs higher throughout the economy.

That is the risk policymakers and investors will be watching closely: whether August represents a temporary energy-driven interruption in the disinflation trend or the beginning of another round of price pressures.

The Fed Faces a Different Inflation Problem

The inflation challenge today looks different from the broad-based price surge that originally forced the Federal Reserve into aggressive monetary tightening. Core inflation has declined substantially, many goods categories are relatively stable, and housing inflation has moderated. But the economy is now dealing with a renewed external shock from energy markets while overall inflation remains above target.

That creates an uncomfortable policy tradeoff. Respond too aggressively to an energy-driven spike, and the Fed risks slowing an economy to address inflation that interest rates have limited ability to fix. Respond too cautiously, and higher energy costs could become embedded in broader prices and inflation expectations.

For investors, that means the CPI report carries implications well beyond the gasoline pump. Inflation influences Treasury yields, mortgage rates, equity valuations, corporate borrowing costs and expectations for monetary policy across nearly every asset class.

August’s data offer both encouraging and concerning signals: core inflation continues to move closer to the Fed’s goal, but the energy shock is now large enough to prevent headline inflation from making the same progress. For the moment, 3.4% inflation is holding steady. What happens next may depend as much on oil markets and geopolitical developments as on conditions inside the U.S. economy.

The 10-Year Treasury Just Hit Its Highest Level Since 2023

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The 10-year Treasury yield touched 4.814% Wednesday, its highest level since November 2023, before easing slightly to 4.77%. The 30-year yield sat at 5.26%, still hovering near the multi-decade highs that rattled markets last month. This is not a new, isolated story. It is the direct convergence of three separate threads that have each been building independently over recent weeks.

The first is oil. Crude prices pushed toward $95 a barrel this week after fresh US strikes on Iran, extending the renewed escalation we covered when fighting resumed after the earlier ceasefire lapsed. Elevated energy prices continue feeding directly into inflation expectations, and rising inflation expectations are one of the most reliable drivers of higher long-term bond yields.

The second is the Fed itself. Chair Kevin Warsh’s hawkish tone at his debut Jackson Hole speech last week set the stage, and Fed Governor Michelle Barr reinforced that posture Tuesday, stating the central bank should raise rates in September if inflation does not show sufficient signs of moderating. Prediction markets responded accordingly, with odds of a September rate hike on Polymarket climbing to 56% following Warsh’s initial remarks, up meaningfully from where they stood before Jackson Hole.

The third thread is less obvious but genuinely important. Rising yields are not only about oil and Fed policy, they also reflect growing investor concern over government debt levels and expanding fiscal deficits, alongside a separate but related dynamic in corporate debt markets. Technology companies building out AI infrastructure are increasingly turning to bond markets to fund that buildout, since the scale of spending required has outpaced what free cash flow alone can cover, a dynamic we detailed closely when BlackRock priced its $12.3 billion data center bond offering for Meta and when CoreWeave raised its own capital expenditure guidance earlier this summer. That wave of new corporate debt issuance adds further supply pressure to long-term bond markets at the exact moment government borrowing is already elevated, a combination that tends to push yields higher independent of any single catalyst.

The market reaction Wednesday reflected this convergence clearly. Rate-sensitive technology and growth stocks sold off sharply, with several names in the AI infrastructure and networking space falling double digits on the day, a pattern consistent with what happens whenever long-term borrowing costs move decisively higher.

For companies operating below the $2 billion market cap threshold, this is precisely the kind of environment worth watching closely. Small and microcap companies carry disproportionately more variable-rate debt than large cap peers, and when oil, Fed policy expectations, and corporate debt supply are all pushing in the same direction simultaneously, the resulting pressure on borrowing costs tends to be more durable and harder to reverse with any single piece of good news. The individual pieces of this story are all familiar. What matters now is that they are no longer moving independently, they are compounding.

The PCE Data Just Came In. It Tilts Toward a September Rate Hike, Not Away From It

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The Personal Consumption Expenditures price index, the inflation measure the Federal Reserve targets most closely, rose 3.7% year over year in July, up from 3.6% in June, the Commerce Department reported Wednesday, coming in a touch stronger than economists had expected. Core PCE, which strips out volatile food and energy prices and is viewed as the cleaner read on underlying inflation pressure, held at 3.3% year over year, showing no improvement from the prior month.

This is the exact data release we flagged as pivotal heading into Fed Chair Kevin Warsh’s upcoming Jackson Hole speech, and it landed on the more hawkish side of the range economists had modeled. The result directly conflicts with earlier reports that had shown consumer price inflation cooling over the prior couple of months, reinforcing just how genuinely unresolved the inflation picture remains heading into the fall.

The Fed has held its policy rate steady in a range of 3.50% to 3.75% since December. Warsh has publicly committed to bringing inflation back to target, but has offered no clear signal on whether he believes that can happen without additional rate increases, and Wednesday’s data does nothing to support the case that it will happen on its own. Heather Long, chief economist at Navy Federal Credit Union, put it bluntly, the United States still has an inflation problem, and argued the latest data buys Warsh some time to wait and assess, but that he will need to be considerably clearer about what specific conditions would actually prompt him to raise rates.

Markets moved quickly to reprice the odds. Fed funds futures now reflect roughly a 44% probability of a September rate hike, up from about 36% just before this report, and traders are now fully pricing in that the Fed will have raised its policy rate by year end.

For companies operating below the $2 billion market cap threshold, this shift in rate expectations carries direct and immediate consequences. Small and microcap businesses typically carry considerably more variable-rate debt than large cap companies, meaning every incremental increase in the probability of a Fed hike translates into a real, measurable increase in borrowing costs across this segment of the market. This report also sharpens the stakes for Warsh’s Jackson Hole address, which now arrives with markets meaningfully more convinced a hike is coming than they were just days ago, making his tone and language around this data the most consequential signal small cap investors will get before the Fed’s actual September decision.

Consumer Sentiment Rose in July Even as Gas Prices Climbed Back Above $4

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American consumers grew more optimistic in July, even as the war with Iran appeared to widen and gasoline prices climbed back above $4 a gallon. The University of Michigan’s final assessment of consumer sentiment for the month showed the headline index climbed nearly 12% from June’s level to 55.2, slightly above the already elevated preliminary reading of 54.4 released earlier in the month.

That improvement comes with an important caveat. Sentiment remains 11% below where it stood a year ago, reflecting what the survey’s director described as a generally somber view of the economy shaped by five years of elevated inflation and persistently high prices. Consumers appear to be focused primarily on pocketbook concerns like purchasing power, with political and military developments registering as more of a background concern than a driver of sentiment itself.

Two Surveys, Two Different Signals

The improvement in the University of Michigan reading stands in contrast to a separate measure of consumer attitudes. The Conference Board’s Consumer Confidence Index actually slid in July, with respondents citing higher gas and grocery prices as a concern even as mentions of geopolitical tension declined. The divergence between the two surveys underscores how sensitive consumer sentiment has become to specific, tangible cost pressures rather than broader macro or political narratives.

The Inflation Backdrop

The sentiment data arrives alongside a genuinely mixed set of economic signals. June consumer prices grew 3.5% year over year, with average hourly earnings gains just barely keeping pace even as inflation cooled modestly from its apparent peak in May. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures index, showed a similar pattern, slower price growth in June compared to the prior month, but still elevated relative to the Fed’s target.

Separately, data released this week showed second quarter economic growth came in slower than expected. Notably, consumer spending itself remained strong even as overall GDP growth decelerated, a combination that suggests households are continuing to spend despite feeling squeezed by prices, rather than pulling back broadly.

Why This Matters for Small Cap Investors

For companies operating below the $2 billion market cap threshold, this data presents a genuinely nuanced picture rather than a clean bullish or bearish signal. Rising sentiment alongside continued strong consumer spending is a constructive combination for consumer-facing small caps in retail, restaurants, and discretionary goods, even if that sentiment remains historically depressed and gas prices continue pressuring household budgets.

The divergence between the University of Michigan and Conference Board surveys is also worth watching closely in the months ahead. If the softer Conference Board reading proves to be the more accurate leading indicator, consumer-facing small caps could see demand soften even as broader sentiment metrics suggest improvement. If the University of Michigan’s more optimistic reading holds, it would support the case that consumers are adapting to a higher cost environment rather than retreating from it entirely, a distinction that matters considerably for companies planning inventory, staffing, and pricing strategy heading into the back half of the year.

June’s Cool CPI Print Sends Treasuries Rallying and Fed Hike Odds Tumbling

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Consumer prices came in far cooler than expected in June, and markets reacted fast. Treasury yields dropped sharply and bets on a July interest rate hike nearly evaporated.

The Consumer Price Index fell 0.4% from May to June, the largest single-month decline since April 2020. On an annual basis, inflation eased to 3.5%. Both figures beat expectations by a wide margin, with forecasts calling for just a 0.1% monthly decline and a 3.8% annual reading.

Falling energy prices did much of the work, as drivers saw real relief at the pump. That’s a sharp reversal from May, when a temporary spike in gas prices tied to conflict in the Middle East had pushed inflation higher.

Core inflation, which strips out volatile food and energy prices, also came in soft. Core prices were flat month-over-month and up 2.6% year-over-year, again below expectations that had priced in a 0.2% monthly gain driven by higher travel and electronics costs.

Bond traders repriced their outlook almost immediately. The two-year Treasury yield, the maturity most sensitive to near-term Fed policy, fell as much as 14 basis points to 4.14%, on pace for its biggest one-day drop since February. Rate-hike expectations for the July Fed meeting, as measured by the swaps market, collapsed from around 40% probability before the report to roughly 20% after.

Market watchers are describing the report as a broad, downside surprise. Fear of a hot print had been building heading into the release, so the miss is being read as bond-friendly and likely to help steepen the yield curve. The growing consensus is that the Fed holds steady rather than moves on rates this month.

The timing is notable. The report landed just a day before the Fed chair is set to testify before Congress for the first time in his role, with inflation expected to be a central topic. Prepared remarks released ahead of the hearing struck a hawkish tone, emphasizing zero tolerance for persistently high inflation. It’ll be worth watching whether that tone shifts now that the data has moved in the Fed’s favor.

The CPI release also landed alongside a strong batch of bank earnings, with results pointing to a resilient underlying economy even as price pressures ease. That combination matters: a slowdown in inflation paired with weak growth would raise questions about the economy’s health, but paired with solid earnings, it reads instead as a sign that price pressures are normalizing without derailing activity.

It’s also a meaningful shift in narrative after a rough spring. May’s inflation report ran hot, largely because of an energy price spike tied to geopolitical tension, and it left markets bracing for a similarly uncomfortable June number. Instead, energy prices reversed course and gave consumers breathing room, which shows up clearly in both the headline and core figures.

For everyday spending, this kind of pullback tends to show up first at the pump and then gradually filters into other categories, though the core reading suggests broader price pressures outside food and energy are still holding fairly steady rather than reversing outright.

Put together, cooler inflation paired with solid earnings is often the combination markets like best — it eases pressure on the Fed without signaling economic weakness. With rate-hike odds falling and yields pulling back, the setup looks constructive for both bonds and rate-sensitive stocks heading into this week’s testimony and the rest of earnings season. Investors will likely be watching upcoming data closely to see whether June’s cooldown holds or proves to be a one-month blip.

Fed Chair Warsh’s Inflation Hard Line Puts Rate-Sensitive Investors on Notice

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There was no ambiguity in Sintra, Portugal on Wednesday. Speaking at the European Central Bank’s annual forum on central banking, Federal Reserve Chair Kevin Warsh delivered a clear message to anyone hoping the Fed had quietly accepted a new normal: it has not. “If there were people who thought that this central bank was going to be comfortable with an inflation objective above 2%,” Warsh said, “I guess they’d be disappointed. We’re going to deliver price stability in the US.”

The comments came two weeks after Warsh’s first press conference as Fed chair, where he struck a markedly more hawkish tone than markets anticipated. Rates remain at 3.50% to 3.75%, but the Fed’s own projections now show officials expect headline inflation to reach 3.6% this year, up sharply from an earlier estimate of 2.7%. Core PCE, the Fed’s preferred inflation gauge, rose to 3.4% in May, its highest reading since October 2023.

Warsh Is Deliberately Withholding Forward Guidance

One of the more consequential shifts under Warsh is what he is choosing not to say. Traditional Fed communication has relied on forward guidance, the practice of telegraphing the likely direction of rates in advance. Warsh has signaled he wants to curtail that approach, and Wednesday’s appearance was consistent: asked about the July 28-29 FOMC meeting, he offered almost nothing beyond promising a “good debate” behind closed doors.

For markets conditioned to reading Fed signals, the absence of guidance is itself a message. Investors can no longer price in a clear rate path, which introduces uncertainty that has historically weighed on higher-volatility, higher-risk assets.

A Complicated Inflation Picture

The path to 2% runs through several crosscurrents. Oil prices fell after President Trump announced a tentative deal with Iran, but negotiations have stalled and both sides have resumed strikes, keeping energy price volatility alive. Meanwhile, AI-driven demand appears to be pushing core prices higher even as supply-side productivity gains remain a future promise rather than a current reality. When asked whether AI is ultimately inflationary, Warsh declined to draw a conclusion, noting only that the Fed will make that determination and act accordingly.

Warsh also pushed back on any suggestion that political pressure would influence policy. “We’ve been an independent central bank for a very long time,” he said. “We’re going to be an independent central bank at this moment.”

What This Means for Small and Microcap Investors

This matters more for small and microcap investors than for almost any other market segment. Companies under $2 billion in market cap carry a disproportionate share of floating rate debt and depend more heavily on external financing to fund growth. When the rate path tilts toward hikes rather than cuts, the cost of that capital rises quickly, and smaller balance sheets feel it first.

The Russell 2000’s record-setting first half of 2026 was built partly on expectations of rate relief that are now being recalibrated. With the July 29 decision approaching and core inflation running above 3%, investors in smaller companies should pay close attention to balance sheet composition. Companies with manageable debt loads and strong cash generation are best positioned to navigate a higher-for-longer environment. Warsh has made his priorities clear. The question now is how quickly inflation answers back.

The Fed’s Preferred Inflation Gauge Just Hit a 3-Year High. A Rate Hike Is Back on the Table

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The inflation data the Federal Reserve cares about most just delivered an unwelcome surprise. The Personal Consumption Expenditures price index — the gauge the FOMC uses to measure progress toward its 2% target — rose to its highest level in three years in May, according to data released Thursday. The reading keeps the prospect of a 2026 interest rate hike firmly in play and complicates the path forward for a central bank already navigating one of the most difficult macro environments in years.

Headline PCE climbed to 3.5% year over year, up from the prior month and the highest since 2023. Core PCE, which strips out volatile food and energy costs and is the measure policymakers watch most closely, also accelerated. The data confirms what last month’s Consumer Price Index reading had already suggested: inflation is not cooling on the timeline markets had hoped for, and the energy-driven spike from the US-Iran conflict has bled into the broader price picture.

Why This Keeps a Hike in Play

The report lands just over a week after new Federal Reserve Chair Kevin Warsh presided over his first FOMC meeting, where the committee held rates steady but dropped its long-standing easing bias and signaled through its updated projections that nine of 18 officials now expect at least one rate hike before year-end. Thursday’s PCE reading strengthens that hawkish case considerably. Markets are now pricing in elevated odds of a rate increase in the second half of 2026 — a dramatic reversal from the rate cuts that were consensus just a few months ago.

For the Fed, the data presents a genuine dilemma. Inflation is accelerating while consumer sentiment recently hit an all-time low and growth signals have been mixed. That combination raises the specter of stagflation — the most difficult environment for any central bank to manage, and one with outsized consequences for smaller, rate-sensitive companies.

Where the Pressure Lands

The companies most exposed to this environment are consumer-facing businesses and those carrying significant variable-rate debt. When inflation erodes real household purchasing power, discretionary spending on dining, travel, apparel, and other non-essentials is typically the first to contract — pressuring the smaller consumer-facing companies that lack the pricing power and balance sheet depth of their large cap peers.

Energy sits on the other side of the equation. As the primary driver of May’s inflation spike, elevated energy prices that squeeze consumers can simultaneously support revenues for oil, gas, and energy infrastructure producers. That divergence is part of what makes the current inflation picture so difficult for the Fed to address with a single policy lever — the same force hurting one part of the economy is helping another.

What Comes Next

The PCE reading sets up a tense second half of the year. If energy prices continue easing as the Iran ceasefire holds and oil retreats below $75, the inflation picture could improve meaningfully in the coming months, giving the Fed room to hold rather than hike. If price pressures prove stickier and spread further into core categories, the case for a hike strengthens with each data release.

For small and microcap investors, the message is to watch the inflation trajectory as closely as the Fed itself. The cost of capital for smaller companies — which carry disproportionately more floating-rate debt than large caps — hinges directly on whether this PCE reading marks a peak or the start of a more troubling trend. Thursday’s number tilted the odds toward caution. The next several data points will determine whether that caution becomes conviction.

Mortgage Rates Climb to 6.52% as Hot Inflation and a Blowout Jobs Report Bury Rate Cut Hopes

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The brief window of mortgage rate optimism that opened earlier this spring is closing quickly. The average 30-year fixed-rate mortgage climbed to 6.52% in the week ending Wednesday, according to Freddie Mac, up from 6.48% the prior week and continuing a drift higher that has now persisted for four consecutive weeks. Rates have been anchored around 6.5% since mid-May — high enough to meaningfully suppress affordability for buyers and far enough above the lows of late 2024 to keep the refinance market largely frozen for the millions of homeowners who locked in rates between 6% and 7% over the past two years.

The catalyst for this week’s move is not one data point but two arriving in rapid succession. Last Friday’s May jobs report showed the economy added 172,000 positions — nearly double the 88,000 economists had expected. Three days earlier, the May Consumer Price Index showed inflation running at 4.2% year over year, the highest reading since 2023, driven primarily by energy costs directly tied to the ongoing US-Iran conflict. Together the two reports delivered a blunt macro message: the US economy is not slowing down, inflation is not cooling, and the Federal Reserve has neither the room nor the justification to cut interest rates anytime soon.

The Fed Picture Has Shifted Materially

Markets have responded accordingly. According to CME FedWatch data, approximately two-thirds of traders now expect the Federal Reserve to raise benchmark interest rates at least once before the end of 2026. As recently as March, the consensus expectation was for two rate cuts by year-end. That expectation has been fully reversed by the combination of persistent energy-driven inflation, a resilient labor market, and a new Federal Reserve chair in Kevin Warsh whose hawkish reputation the market is still calibrating.

Warsh chairs his first FOMC meeting June 16-17 — five days from today. A rate hike is not expected at this meeting, but his post-decision press conference and the committee’s updated dot plot will be the most consequential signal for mortgage rates in the second half of 2026. If the dot plot reflects a committee leaning toward one or more hikes before year-end, Treasury yields will move higher and mortgage rates will follow.

The Housing Market Is Adapting — Imperfectly

Despite rates holding near 6.5% for the past month, buying and selling activity actually picked up in May — a signal that buyers are gradually recalibrating expectations around a higher-rate environment rather than waiting indefinitely for relief. The traditional spring selling season has not collapsed. It has simply compressed into a narrower band of motivated buyers and sellers willing to transact at current levels.

The challenge for smaller companies in the real estate ecosystem is that this adaptation is uneven. Regional homebuilders, independent mortgage originators, title insurance companies, and real estate technology platforms in the sub-$2 billion market cap range are all operating in a market where transaction volume remains structurally suppressed relative to the 2020-2022 cycle. Community banks and smaller mortgage lenders face an additional layer of complexity: the spread between their cost of funds and their lending rates determines profitability, and in a higher-for-longer environment, that spread is being compressed by competition for deposits.

For mortgage REITs — many of which trade in the small and microcap range — the combination of elevated short-term rates, a flat yield curve, and refinance activity near multi-decade lows represents a direct earnings headwind that is not resolving on any near-term timeline.

The 30-year fixed rate at 6.52% is not the ceiling. The FOMC meeting next week will determine whether it becomes the floor.

The Most Pessimistic American Consumer Sentiment in 74 Years Just Sent the Market a Warning

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The University of Michigan released its final May Consumer Sentiment reading Friday morning and the number landed well below even the most pessimistic forecasts. The index came in at 44.8 — a new all-time record low in a survey that has been tracking American consumer attitudes since 1952. The reading missed the consensus estimate of 48.2 by a wide margin, fell five full points from April’s already-depressed 49.8, and marked the third consecutive month of decline. No monthly reading in the survey’s 74-year history has ever been lower.

To place that in context: this reading is worse than June 2022 at the peak of post-pandemic inflation. Worse than the depths of the 2008 financial crisis. Worse than the early 1980s when Paul Volcker was hiking rates into double digits to break inflation. The American consumer, by this measure, has never been less confident about the economy than they are right now.

What’s Driving It

The culprits are not subtle. One-third of survey respondents spontaneously cited gasoline prices — unprompted — as a primary concern. Roughly 30% mentioned tariffs. The Iran conflict, now in its twelfth week, has pushed the national gas average to $4.56 per gallon according to AAA, up more than 50% since hostilities began February 28, and GasBuddy projects the summer average could reach $4.80 per gallon with $5 possible if the Strait of Hormuz remains closed.

Inflation expectations are deteriorating further rather than stabilizing. Year-ahead inflation expectations climbed from earlier in the month while long-run expectations rose from 3.5% in April to 3.9% in May — the highest reading since the Iran conflict began and well above the 2.8% to 3.2% range that prevailed throughout 2024. Surveys director Joanne Hsu noted that consumers appear to be moving beyond viewing the inflation pressure as temporary, increasingly worried it will spread beyond fuel prices and persist over the long run.

The demographic breakdown adds another layer. Lower-income consumers and those without college degrees — groups most sensitive to gas and grocery price increases — posted the sharpest sentiment declines. Independents and Republicans reached their lowest readings of Trump’s second term. The breadth of the deterioration, cutting across income levels, age groups, and political affiliations, signals this is not a narrow or politically driven reading. It is a broad-based erosion of consumer confidence.

The Direct Small Cap Implication

Consumer sentiment is a leading indicator — it tells you where spending is headed before the spending data confirms it. And for small and microcap investors, the message embedded in Friday’s reading is direct: companies that depend on discretionary consumer spending are heading into Q2 earnings season with the wind at their back nowhere.

Consumer-facing small caps in casual dining, specialty retail, leisure travel, and discretionary goods are the most exposed. Unlike large cap consumer companies with global revenue diversification and balance sheet depth to absorb volume softness, smaller operators have limited buffers. Margin compression from elevated input and fuel costs combined with softening top-line demand is a particularly difficult combination for companies already operating on thin margins.

The record low also raises the stakes for the Federal Reserve. Weak consumer confidence alongside elevated inflation expectations is the definition of a stagflationary signal — and a Fed led by incoming Chair Kevin Warsh that leans hawkish has limited room to provide relief. Rate cuts that smaller companies have been counting on to refinance variable-rate debt are moving further off the table with every data point like this one.

Seventy-four years of data. The American consumer has never felt worse. That number belongs in every small cap portfolio conversation happening right now.

Three Percent and Stuck: What February’s PCE Report Means for Small Cap Investors

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February’s Personal Consumption Expenditures (PCE) report, released Thursday, confirmed what many on Wall Street suspected but hoped wasn’t true: inflation remains stubbornly entrenched, and the Federal Reserve has no clear path to cutting interest rates anytime soon. For small and microcap investors, this isn’t just a macro headline — it’s a direct input into valuations, borrowing costs, and growth timelines.

The Fed’s preferred inflation gauge rose 2.8% in February on a headline basis. Core PCE, which strips out food and energy and is the number the Fed actually weighs policy decisions against, came in at 3.0% — exactly where it has been parked for three consecutive months. On a 3-month annualized basis, core inflation is running at 3.7%, nearly double the Fed’s 2% target. The report was delayed from its original March 27 release date due to the government shutdown last fall, making today’s release the first clean read the market has had in months.

The timing is particularly complicated. This data reflects economic conditions that existed before the Iran conflict escalated, before oil prices surged, and before the Strait of Hormuz disruptions began compressing global supply chains. In other words, the inflation picture captured in February’s numbers is arguably the best it’s going to look for a while — and it still isn’t good enough for the Fed to act.

Goods inflation clocked in at 0.84% for the month, a figure economists point to as evidence that tariff pass-throughs are still working their way into consumer prices. That’s the sticky problem: even if geopolitical tensions ease, tariff-driven inflation has its own timeline, and the Fed can’t cut its way around it.

The one silver lining in the report was services inflation, which showed meaningful improvement in February. Services prices have been a persistent headache for central bankers because they typically reflect wage pressures and domestic demand — both harder to control than goods prices. The improvement suggests that underlying inflation may not be structurally broken, even as energy shocks pile on.

The practical read for small and microcap companies is this: the higher-for-longer rate environment is not lifting anytime soon. Small companies carry a disproportionate share of variable-rate debt and are more sensitive to the cost of capital than their large-cap counterparts. When borrowing costs stay elevated, growth initiatives slow, refinancing gets expensive, and M&A activity tightens — all headwinds for the small and microcap universe.

That said, today’s Iran ceasefire news introduces a meaningful counterweight. Oil prices have already begun pulling back, which relieves some of the near-term inflationary pressure the Fed has been bracing for. If the ceasefire holds and energy prices stabilize, the Fed may not need to hike — it just may not be in position to cut either.

Futures market participants have already absorbed this reality, with nearly 90% now expecting the Fed’s target rate to hold at 3.50%–3.75% through September 2026.

For investors focused on smaller companies, the message is clear: fundamentals matter more than ever in this environment. Companies with strong cash flows, manageable debt loads, and pricing power are best positioned to navigate a world where rate relief isn’t coming on anyone’s preferred schedule.

No Cuts, No Ceasefire, No Clarity: The Macro Wall Investors Are Staring Down

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The macro environment got more complicated overnight. President Trump’s prime-time address Wednesday signaling fresh US military strikes on Iran within the next two to three weeks sent oil prices surging past $110 a barrel and triggered a broad selloff in US Treasuries — a combination that has real consequences for the small and microcap companies ChannelChek covers every day.

US two-year yields climbed as much as six basis points to 3.86%, while 10-year yields rose as high as 4.38% before trimming some of the move. The dollar strengthened against all its Group-of-10 peers. Global bond markets followed suit, with Australian and New Zealand 10-year yields rising more than 10 basis points and European traders pricing in three quarter-point ECB rate hikes this year.

The Fed Is Now Boxed In

Before the Iran conflict escalated in late February, markets had priced in more than two Federal Reserve rate cuts in 2026. Those expectations have been completely erased. Overnight index swaps now reflect a Fed that stays on hold for the remainder of the year — a meaningful pivot that ripples directly into how investors value growth-oriented, capital-dependent smaller companies.

The inflation data is not helping. The ISM’s gauge of prices paid for manufacturing inputs climbed to 78.3 in March, remaining at its highest level since mid-2022. That number landed just as oil was spiking, reinforcing the concern that energy-driven inflation isn’t transitory — it’s structural for as long as the Strait of Hormuz remains closed or threatened.

Fed Chair Jerome Powell said earlier this week that longer-term inflation expectations appear to be in check, but acknowledged officials are closely monitoring the situation. The market isn’t waiting for clarity. The arm wrestle between inflation fear and growth concern — as Westpac’s Martin Whetton put it — is now the defining tension in fixed income, and it’s not resolving anytime soon.

Why This Matters for Small and Microcap

Small and microcap companies feel rate environment shifts more acutely than large caps for a straightforward reason: they depend more heavily on external financing. When rate cut expectations evaporate and credit conditions tighten, the cost of capital rises and the timeline for profitability gets scrutinized harder. Biotech companies burning cash toward clinical readouts, small industrials refinancing debt, and emerging growth companies looking to raise equity — all of them operate in a tougher environment when the Fed is frozen and bond yields are climbing.

The growth risk is equally significant. Higher oil prices function as a tax on consumers and businesses alike. Money managers at PIMCO and JPMorgan Asset Management have already signaled they’re positioning for an economic slowdown that will eventually drive a bond market rebound — which would suggest yields come back down, but only after a growth scare first. That sequence — inflation now, slowdown later — is historically difficult for smaller companies to navigate.

The Geopolitical Wildcard

What makes this environment particularly hard to trade is the binary nature of the catalyst. A ceasefire announcement could reverse oil prices and Treasury yields in a session. But as M&G Investments’ Andrew Chorlton noted, even a ceasefire is likely to be fragile, and markets may be underestimating the inflationary consequences of a conflict that could continue to flare up unpredictably. The risk premium, he argued, should be higher than where markets are currently pricing it.

For investors focused on small and microcap names, the near-term playbook is one of selectivity — companies with strong balance sheets, near-term catalysts, and limited macro exposure are better positioned to weather the volatility than those dependent on a benign rate environment to execute their growth strategy.

The macro has reasserted itself. Navigate accordingly.

Trump Waives the Jones Act: A Bold Bet to Cool Surging Oil and Gas Prices

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President Trump issued a 60-day waiver of the Jones Act on Wednesday in a bid to cool surging domestic energy prices as the Iran conflict continues to hammer global oil markets. The move, confirmed by White House press secretary Karoline Leavitt, opens U.S. ports to foreign-flagged vessels for the next two months — covering crude oil, refined products like gasoline and diesel, natural gas, coal, fertilizer, and other energy-derived commodities.

The decision comes as Brent crude crossed $109 per barrel Wednesday morning — up more than 7% on the day — while WTI traded above $97. Gas prices at the pump have climbed to a national average of $3.84 per gallon, up sharply from $2.92 just one month ago, according to AAA data. Diesel has already crossed $5 per gallon nationally. The administration is clearly feeling political pressure to act ahead of the midterm cycle, and the Jones Act waiver is the most tangible move it has made so far.

What the Jones Act Actually Does

The Jones Act — formally the Merchant Marine Act of 1920 — requires that any cargo transported between U.S. ports be carried by vessels that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed. The law was designed to protect the domestic shipping industry after World War I, but has long been criticized by economists as an inflationary form of protectionism that raises the cost of moving goods within the country. With fewer than 100 Jones Act-compliant vessels in existence, the waiver immediately opens the door to a much larger pool of international tankers to move fuel between domestic ports.

The Practical Impact — And Its Limits

In theory, the waiver should have its biggest effect on refined product shipments from Gulf Coast refinery complexes to the more isolated East Coast — a corridor that has historically been a bottleneck during supply disruptions. Cheaper, more accessible shipping capacity means fuel can theoretically move faster and at lower cost to the regions that need it most.

But experts are already tempering expectations. The core problem isn’t moving fuel — it’s refining it. Most U.S. refineries are configured to process heavier Middle Eastern crude grades, while domestic shale production yields lighter oil. That structural mismatch means the U.S. still cannot fully self-supply even with more flexible shipping rules. The waiver makes domestic logistics more efficient, but it does not solve the underlying supply equation.

The Broader Policy Picture

The Jones Act move is reportedly just one item on a broader White House menu of potential energy interventions being considered, including possible Treasury-led action in energy futures markets and export bans on crude and refined products. Any of those measures — if enacted — would carry significant market implications across the energy sector.

For small and microcap investors, the read-through is layered. Domestic shippers and Jones Act operators could see near-term pricing pressure as foreign competition enters the market. Refiners with Gulf Coast exposure and East Coast distribution capability may benefit from improved logistics economics. And any company with meaningful fuel cost exposure — from regional truckers to agricultural operators to industrial manufacturers — should be watching this space closely as the administration continues to improvise policy responses to a crisis with no clear end date.

The 60-day clock starts now.

February CPI Comes in Tame at 2.4%, But the Calm May Be Short-Lived

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The Bureau of Labor Statistics reported this morning that the Consumer Price Index rose 0.3% on a seasonally adjusted basis in February, following a 0.2% gain in January, putting the 12-month inflation rate at 2.4% — unchanged from the prior month and matching Wall Street’s consensus forecast.

Core CPI, which strips out volatile food and energy prices, posted a 0.2% monthly gain and a 2.5% annual rate — both figures in line with forecasts. On the surface, this is a clean report. But the backdrop is anything but.

By the Numbers

Shelter was the largest driver of the monthly increase, rising 0.2%. Food climbed 0.4% for the month and 3.1% over the past year, while energy rose 0.6%. Rent posted its smallest monthly gain since January 2021, rising just 0.1% — a meaningful data point for commercial real estate and housing-related stocks. On the services side, medical care, airline fares, and apparel were among categories posting increases, while used cars and trucks, motor vehicle insurance, and communication costs declined.

Ground beef prices have risen roughly 15% year-over-year, driven by the U.S. cattle supply sitting at multi-decade lows. Coffee prices are up approximately 18% over the same period, largely due to adverse weather conditions among major producers in Vietnam and Brazil. On the other side of the ledger, egg prices fell 3.8% for the month, bringing the annual decline to 42.1%.

The Iran Variable

The February data carries an asterisk: it captures the period before the Iran war broke out in late February, since which oil prices have surged sharply. Average gasoline prices hit $3.50 per gallon as of Monday — their highest level since 2024 — up roughly 19% from $2.94 just two weeks prior.

The downstream risks are significant. A prolonged conflict that inflicts even minor damage to energy infrastructure could push U.S. oil prices to approximately $100 per barrel for the remainder of the year, lifting CPI inflation to an estimated 3.5% by year-end. Gasoline prices in that scenario could approach $5 per gallon in Q2. Analysts also flag that higher diesel costs filter directly into food prices through transportation, and elevated jet fuel will squeeze airline margins heading into peak travel season.

Fed Implications

From the Fed’s perspective, this report likely keeps the central bank on hold as it monitors how prior rate cuts and the current geopolitical tensions shape the economic outlook. Traders are now assigning a near-100% probability that the Fed holds at its March 18 meeting, with the next potential cut not expected until July or September at the earliest.

Moody’s chief economist Mark Zandi noted that he sees no sign inflation is decelerating, calling it “uncomfortably and persistently high” for necessities including electricity, food, apparel, medical care, and housing — and that assessment predates the Middle East escalation.

For small and microcap companies, the implications are layered. Input cost pressures — particularly in food, energy, and transport — will disproportionately affect businesses with thinner margin buffers. If the Iran conflict sustains elevated energy prices into Q2 and Q3, companies in consumer discretionary, logistics, agriculture, and specialty retail will face a more challenging cost environment just as the Fed remains sidelined.

The March CPI report, which will capture the initial shock of surging oil prices, is scheduled for release on April 10.