Stocks Advance on Rate Cut Expectations; Tariff Risks and Sector Divergence Persist

Stocks enjoyed another winning week, despite a pullback last Friday. Overall, investor sentiment remained optimistic due to continued expectations of an interest rate reduction by the Federal Reserve next month. The latest data revealed that inflationary pressures showed signs of moving higher. Retail sales advanced in July, as expected, as summer spending remained solid, although sales in some sectors exposed to higher tariffs declined. In addition, more tariffs could be forthcoming after President Trump said he would announce tariffs on imports of steel and semiconductor chips in the coming weeks. Health Care outperformed among the market sectors, while Industrials, Real Estate and Utilities declined. Bond yields held around 4.3% for most of the week. Crude oil prices declined as traders awaited the outcome of talks between Presidents Trump and Putin, with expectations that a ceasefire between Russia and Ukraine could lead to increased Russian oil production.

Inflation Measures Increased in July

The Consumer Price Index for July rose 0.2% after increasing 0.3% the prior month. Shelter prices rose 0.2% in July and were the primary factor in the monthly increase. In July, food prices were unchanged from the previous month, while energy prices fell 1.1%. Prices less food and energy (core prices) advanced 0.3% in July (0.2% in June). Over the last 12 months, consumer prices have risen 2.7%, unchanged from the same period ended in June. Core prices rose 3.1% for the 12 months ended in July, up 0.2 percentage point from the June figure.

The Producer Price Index rose 0.9% in July after remaining unchanged in June. Producer prices advanced 3.3% for the 12 months ended in July, the largest 12-month increase since rising 3.4% in February 2025. A 1.1% increase in prices for services accounted for more than 75% of the overall increase in prices. Goods prices rose 0.7% last month. In July, producer prices less foods and energy rose 0.4%, while prices less foods, energy and trade services advanced 0.6%. This report may evidence a jump in consumer prices down the line as higher tariffs are passed through.

Eye on the Week Ahead

July data on housing starts and existing home sales is available this week. The housing sector has slowed somewhat due to elevated mortgage rates and asking prices.