Higher Inflation, Higher Yields, Higher Stakes

One Small Step for SpaceX, One Giant Leap for Speculation?

This week, we discuss rising inflation, the upcoming Federal Open Market Committee meeting, and the much anticipated SpaceX initial public offering. Consumer prices continued to accelerate in May, with headline CPI rising 4.2% from a year earlier and core CPI increasing 2.9%. Alternative measures of inflation, including median, trimmed mean, and sticky CPI, also pointed to broadening price pressures. Producer prices rose at their fastest pace since 2022, prompting economists to revise their forecasts for the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures index, higher. The renewed inflationary pressure complicates the outlook for monetary policy. With inflation moving further from the Federal Reserve's target, policymakers may find it increasingly difficult to justify lower interest rates and could instead be forced to maintain or even tighten policy. We examine the forces shaping the inflation outlook and discuss what investors should expect from the next FOMC meeting under the leadership of Kevin Warsh. We also turn to the SpaceX initial public offering and the broader state of financial markets. Investor enthusiasm for high growth companies remains intense, even as SpaceX, Anthropic, and OpenAI continue to generate substantial losses. The willingness of investors to assign extraordinary valuations to unprofitable businesses evokes uncomfortable comparisons with the technology boom of the late 1990s.

The Rally Meets Reality

In this episode, we discuss the latest labor market releases, deteriorating consumer balance sheets, and Friday's decline in equity markets. While payroll growth exceeded expectations and the unemployment rate held steady at 4.3%, the composition of employment gains, the timing of the Memorial Day holiday, and several other details within the report continue to suggest a less encouraging picture of the economy. Meanwhile, consumer debt continued to rise, with revolving credit balances, much of which consists of credit card borrowing, increasing at an annualized rate of 10% in April after rising 9% in March. These figures are particularly troubling given that the personal savings rate remains near historic lows and credit card delinquencies have climbed to levels not seen since the Global Financial Crisis. Consumers appear increasingly reliant on borrowing to sustain spending, a dynamic that has rarely ended well. Friday's sell off in equity markets served as a reminder of the fragility underlying the recent rally. Weaker than expected revenue guidance from Broadcom, renewed concerns about inflation, and rising expectations that the Federal Reserve may be forced to raise interest rates before year end all contributed to the decline.

Getting Better?

This week, we discuss downward revisions to GDP, persistent inflation and a renewed decline in the savings rate. Real GDP growth in the first quarter of 2026 was revised down from 2.1% to 1.6%, well below the consensus estimate of 2.2%. Meanwhile, inflation remained uncomfortably high. The PCE price index rose 3.8% from a year earlier, while core PCE increased 3.3%, both still far above the Federal Reserve’s 2% target. The same report offered little comfort on the consumer. Real disposable personal income fell 0.5%, consumption rose just 0.1%, and the savings rate dropped to its lowest level since the eve of the Global Financial Crisis.

Higher Inflation, Higher Yields, Higher Stakes

This week, we discuss a series of perplexing market moves as inflation readings, oil prices, and Treasury yields all moved higher at once. Both headline CPI and PPI surprised to the upside, placing the Federal Reserve and its new Chair, Kevin Warsh, in an increasingly difficult position. According to the latest inflation nowcast from the Federal Reserve Bank of Cleveland, inflation is expected to come in at more than double the Fed’s two percent target. Meanwhile, yields on ten and thirty year Treasuries climbed sharply as investors demanded greater compensation for rising inflation risks and mounting concerns over America’s fiscal trajectory. The yield on the thirty year Treasury bond has now reached its highest level in nineteen years. Oil prices have also continued their ascent. Equity investors, however, appear largely unconcerned, choosing instead to focus on strong earnings reports from the hyperscalers. The divergence between buoyant equity markets and increasingly anxious bond markets suggests that investors are drawing very different conclusions about the economic outlook.

Payrolls and Patience

This week, we discuss the Employment Report, the Job Openings and Labor Turnover Survey, and the Berkshire Hathaway Annual Meeting. Although the headline employment figures appeared strong, the underlying composition was less reassuring. Nearly all of the payroll growth came from lower wage sectors and industries where workers are more likely to hold multiple jobs. In that sense, the rise in payrolls may be less a sign of strength than of strain, as more consumers take on additional work to make ends meet. That interpretation was reinforced by a 449,000 increase in the number of people working part time for economic reasons. The JOLTS survey told a similarly subdued story, with low quits suggesting continued uncertainty and caution among workers. Finally, Greg Abel’s message from the Berkshire Hathaway meeting echoed our own: be patient. Warren Buffett noted that there had been only five truly “juicy” periods in his career. Until such opportunities return, Berkshire will continue selling equities and holding cash in Treasuries. Without those rare windows, Buffett’s extraordinary record of outperforming the market by roughly two times over six decades would likely not have been possible.