Tame Core CPI Extends Fixed-Income Rally, Countering Geopolitical Complications: Aug. 12, 2026

A tame core CPI is extending yesterday’s fixed-income rally, which is once again overcoming higher energy prices resulting from an unclear timeframe for the US and Iran to reach a deal to open the Strait of Hormuz. It’s the second consecutive day of Treasuries gaining amidst heavier crude costs, as the recent correlation between yields and oil buckles against the backdrop of investors considering the impacts of economic slowdown risks alongside decelerating inflation across the yield curve. More specifically, market participants believe that the likelihood of the Fed pausing in September is increasing due to the following reasons:

• The labor market appears fragile with data from last Friday pointing to job losses
• Today’s core CPI has sunk to match its lowest point since February, which prior to that was the coolest going back to March 2021

Still, the odds favor a rate increase occurring in either October or December after monetary policy officials take time to gauge the temperatures of both sides of the central bank’s mandate. The dovish tilt, however, along with improving optimism about AI’s ability to power corporate earnings further subsequent to well-received quarterly reports from Super Micro and CoreWeave, is lifting stocks, with 7 of the 11 principal sectors and the 4 major domestic benchmarks advancing. Tech and semis are leading, even as the Mag7 ex Nvidia struggles. Additionally, looser financial conditions are driving bids for precious metals and cyclical commodities while the greenback is nearly flat. Elsewhere, premiums for volatility protection instruments are easing as equity hedges get dropped in light of offensive Wall Street winds.

Inflation Print Meets Expectations

The July Consumer Price Index (CPI) came in exactly as expected this morning and featured no surprises. The headline rose 0.1% month over month (m/m) and 3.4% year over year (y/y) while the core segment, which excludes food and energy, increased 0.2% m/m and 2.5% y/y. In June, the gauge recorded m/m and y/y results of -0.4% and 3.5% on the former and 0% and 2.6% on the latter. July’s headline deceleration was led by gasoline and food at markets falling 2.9% and 0.1% m/m. Additionally, tame 0.1% m/m increases in shelter, apparel, new vehicles and electricity also contributed to a subdued reading. Conversely, medical care services, used cars, food at restaurant/bars and transportation services saw heavier m/m expansions of 0.6%, 0.4%, 0.3% and 0.3%.

Past performance is not indicative of future results.

Fed To Hold Next Month

Today’s cool core number paired with a headline figure that is meaningfully above it signal to the Federal Reserve that cost forces would be near the organization’s 2% target if it weren’t for geopolitical tensions supporting loftier fuel charges. Meanwhile, declining nonfarm payrolls amidst evidence of labor market risks are warning the central bank to focus on both employment and inflation to keep the expansion alive and well. The recent data justify a shift from Chair Kevin Warsh’s unwavering attention to quelling price pressures towards a broader mindset characterized by an increasingly evenhanded approach. Finally, investors can capitalize on the current disinflation and falling worker headcounts by adding duration to portfolios, because long-end Treasuries currently offer an asymmetrical risk-reward opportunity, since rates could fall significantly from here, but can’t rise substantially at this juncture in my opinion.

International Roundup

AI Pumps Up Japan Business Confidence

Business confidence in Japan strengthened this month with the Reuters Tankan Index climbing from 13 to 18 for manufacturers and from 25 to 28 for service providers. The gauge is designed to be a preview of the Bank of Japan’s quarterly survey. The findings come shortly after the Economy Watchers’ Index depicted similar improvements in businesses’ assessments of current conditions and expectations. The Reuters Tankan release confirmed that manufacturers are benefiting from strong demand for AI technology. One survey respondent, for example, said orders for such products have doubled to an unprecedented level. This trend contributed to the chemicals group and the metal and machinery category climbing from 23 and 12 to 33 and 25. Manufacturers anticipate stable conditions going forward with the headline gauge expected to sink only two points to 16 in November. The non-manufacturers index is expected to stay unchanged at 28. Last week, the Economy Watchers’ Index, which is based on surveys of firms that deal directly with the public, pointed to economic improvements, with the gauge of current conditions ascending 0.4 points in June to 44.4 and the view of the future climbing 5 points to 45.7.

South Korea’s Unemployment Rate Climbs Slightly

South Korea’s unemployment rate climbed 0.1 percentage point to 2.8% in July despite the country’s payrolls expanding by 108k, or 0.4%, y/y, according to the Ministry of Data and Statistics. However, the number of unemployed individuals was up by 50k, or 6.9% from the year-ago period. The category of individuals with ages ranging from 15 to 29 was particularly weak and detracted from payrolls by 191k. 

Canada Building Permits Increase After Two Monthly Declines

Demand for hospitals and other types of institutional buildings resulted in the value of construction projects approved in Canada climbing 18.5% m/m during June, which reversed two consecutive months of declines, according to Statistics Canada. After headline retreats of 1.7% and 7.6% in May and April, the June print blew past the economist consensus estimate for a 0.8% increase. The residential sector, with a 6.3% m/m increase, also contributed to the strong June reading, albeit to a lesser extent.