The last letter promised a stretch of data dense enough to test every forecast on the board. This letter will cover the last two weeks. The data arrived, and most of it passed with room to spare: jobless claims at their lowest in more than half a century, consumer spending revised higher and a Beige Book with nearly every district growing. Then the truce with Iran collapsed, the Strait of Hormuz slammed shut once more and the energy shock that looked all but finished came roaring back for a second act.

Executive Summary

• It is likely the Federal Reserve will deliver a hawkish hold at its July 29 meeting, leaving the policy rate unchanged while Chair Kevin Warsh lets tighter financial conditions do some of the work. Market-implied odds of a July rate hike have climbed to roughly one in three, from less than one in six a week earlier.
• The collapse of the United States-Iran truce has reclosed the Strait of Hormuz, and wholesale prices imply retail gasoline could climb back toward $4.50 per gallon later this summer, reversing weeks of relief at the pump.
• Headline Consumer Price Index (CPI) inflation fell 0.4% in June, lowering the annual rate to 3.5% from 4.2%, while core prices came in flat, a benign reading that showed little of the tariff or artificial intelligence (AI) passthrough the Fed has watched for.
• Initial jobless claims fell to 187,000, the lowest level since 1969, and upward revisions left second-quarter real consumer spending tracking a 2.5% annualized gain, a marked step up from the sub-2% pace expected earlier.
• New home sales rose 1.6% to a seasonally adjusted annual rate (SAAR) of 628,000 in June, with large upward revisions confirming that May’s weak reading was not a downturn, even as homebuilder sentiment fell to 34, its fifteenth consecutive month below 40.
• The June federal budget deficit swung to $120 billion, from a $27 billion surplus a year earlier, and estimates peg second-quarter Gross Domestic Product (GDP) growth at a provisional 1.8% annualized, as a jump in imports largely offset an AI-driven investment surge.
• A scheduled September 30 methodology change should trim annual core Personal Consumption Expenditures (PCE) inflation for June by 0.2 percentage point, to 3.1%, giving the committee’s doves a little more cover to keep the next policy move a cut rather than a hike.

The Fed: A Hawkish Hold in a Gathering Storm

The Federal Reserve meets on July 29, and we expect the most likely outcome to be a hawkish hold: no change in the policy rate, paired with a reminder from Chair Kevin Warsh that the commitment to 2% inflation still stands. The logic is that tighter financial conditions can do part of the tightening for the committee, sparing it from acting on a situation that remains genuinely volatile. Renewed fighting with Iran has lifted the market-implied probability of a July hike to about one in three, up from less than one in six only a week earlier, yet with the course of the war uncertain and inflation expectations still well anchored, it is likely too soon to push the Federal Open Market Committee (FOMC) into raising rates.

The data since June give the committee cover to wait. Job growth slowed last month, underlying price pressures eased, and both point toward a prolonged pause rather than a fresh tightening cycle. The Federal Reserve’s own Beige Book reinforced the point, with 11 of 12 districts reporting growth, the most since January 2025, though those responses arrived before the July flare-up in the Middle East. A quieter piece of news helps as well. A scheduled revision to inflation methodology, due September 30, should lower annual core PCE inflation for June by 0.2 percentage point, to 3.1% from 3.3%, with the adjustment concentrated in the AI-driven portfolio management and computer software categories.

Trade policy delivered its own reminder that the tariff drama is not quite over. A wave of new Section 301 tariffs on 80 economies, ranging from 10% to 12.5%, mostly replaces the expiring Section 122 tariffs. This leaves the effective tariff rate below 10%, still lower than it stood on the eve of the Supreme Court decision that struck down the earlier regime. Given the magnitude of this effect, tariffs appear to largely be in the rearview mirror for inflation. One open question lingers, however, since a threatened 50% tariff on Canada, delayed until August 19, would nudge the overall effective rate higher and sting plastics producers and homebuilders in particular, though the delay leaves ample room for an off-ramp.

• Key Takeaway: The July meeting looks likely to end where the last several have, with rates on hold and a chair content to let markets tighten conditions for him.

Energy and the Middle East: Back to the Strait

For a few weeks in early summer, the energy story read like a recovery. Then the truce between the United States and Iran fell apart on July 7, and the improvement unraveled in a hurry. Continued fighting has reclosed the Strait of Hormuz, and a Houthi attack on shipping in the Red Sea now threatens the main alternative route for moving Gulf oil to the rest of the world. The relief valve that opened in June has swung shut again.

The arithmetic of a gasoline spike is not complicated, only unwelcome. Wholesale prices suggest retail gasoline could return toward $4.50 per gallon later in the summer, a sharp turn from the gentle decline of a few weeks ago. As a rule of thumb, every 10-cent rise at the pump drains about $12 billion, or 0.06%, from what consumers can spend elsewhere, so a sustained 50-cent jump would subtract as much as $60 billion, or 0.3 percentage point, from consumer spending. For a consumer already coping with flat real incomes, that is a meaningful bite.

The offset, and there is one, comes from the supply side. Higher prices are finally coaxing more investment out of the domestic energy patch, with the drilling rig count climbing and the Dallas Federal Reserve’s latest survey pointing to faster activity. Because the United States is a small net exporter of energy, stronger domestic production should, over time, largely offset the hit to domestic consumers. The catch is timing, since consumers adjust faster than producers, so the early sting lands on households while the benefit to output arrives later. Therefore, there is hope that the growth damage is more modest even as the near-term risk to inflation clearly points higher.

• Key Takeaway: The Strait of Hormuz has closed again, and the second energy shock of the year has begun. The damage to growth looks contained, since higher prices are reviving domestic drilling, but the hit to inflation and to household budgets is immediate, and it arrives just as the Federal Reserve would have preferred a quiet summer.

Inflation: A Benign Snapshot Before the Clouds

Timing is everything, and June’s inflation data captured the calm just before the storm rolled back into view. Headline CPI fell 0.4% in June, pulling the annual rate down to 3.5% from 4.2%, as tumbling gasoline prices did most of the work. The more reassuring detail sat underneath, since core prices came in flat, with none of the broadening across goods and services that most worries the Fed. Tariff passthrough, long expected, stayed largely invisible, as new vehicle and apparel prices held flat.

The Fed keeps watch on three inflationary forces: tariffs, AI and the passthrough of oil prices. In June, all three stayed muted. AI-related pressure showed up less than expected, even though a memory chip shortage has pushed Apple to raise prices on some popular computers, an increase that should surface more clearly in the July figures. Oil passthrough is the one to watch. The prices of petroleum-based goods such as toys, household supplies and furniture edged higher last month, and with oil climbing again, that feedthrough could prove more drawn out than earlier assumed.

The producer side told a similar story with a similar caveat. The Producer Price Index (PPI) fell 0.3% in June, easing annual producer inflation to 5.5% from 6%, its first monthly decline since August 2025, as energy prices dropped 6.4%. Yet the core told the same stubborn tale as the consumer data, with core goods prices holding above 5% year over year and electronics components and accessories running up 28% and doing most of the lifting, the fingerprints of the AI-driven shortage in memory chips. With June CPI and PPI both in hand, Oxford Economics puts its PCE nowcast at 3.7% annually, an encouraging deceleration from May’s 4.1%.

Import prices offered a preview of relief still in transit. They rose 0.3% in June, leaving the annual gain at 7.1%, the strongest since August 2022, but the June survey predates the drop in oil and so understates the relief coming next month. The sticky spot, once again, was technology, as capital goods import prices kept climbing and computer and electronic accessory prices jumped another 0.7%. The pattern rhymes across every price gauge this month, with energy pulling the headline down while AI pushes the core up.

• Key Takeaway: June’s inflation readings were genuinely encouraging, with the headline cooling and the core refusing to broaden. The asterisk is chronology, since nearly all of it landed before the Strait of Hormuz reclosed, so the next round of data will show whether the calm survives contact with the second energy shock.

The Consumer and Labor Market: Strength Beneath the Noise

If the Fed wanted evidence that the economy could absorb a shock, the labor market delivered it. Initial jobless claims fell 22,000 to 187,000 in the week ended July 18, the lowest level since September 1969, a figure so low it predates the microprocessor. Some of the drop reflects summer seasonal quirks, including auto plant shutdowns that ran smaller than usual and New York school workers cycling through the claims data, yet the trend is unmistakable. Continued claims have slid to lows last seen in 2023, and given low layoff rates, warmer payroll gains, and weak labor supply growth the unemployment rate, at 4.2%, is likely to hold near current levels or drift lower.

Spending held up better than the headline suggested. Retail sales rose a modest 0.2% in June, as a 5.3% drop at gas stations held back the top line while strong auto sales and an Amazon Prime Day surge in online spending carried the control group. The revisions were the real story. Upward adjustments to prior months left second-quarter real consumer spending on track for a 2.5% annualized gain, well above the near-2% pace previously expected and a sharp acceleration from 0.5% in the first quarter. A resilient labor market and the tailwind from rising financial wealth have kept the registers busy.

Sentiment improved too, though the calendar undercuts it. The University of Michigan consumer sentiment index rose to 54.4 in July, from 49.5 in June, a second straight monthly gain. The problem is that respondents finished roughly 70% of the interviews before the truce with Iran collapsed, so the final reading will likely give much of that back. Small businesses shared the brighter early-July mood, with the National Federation of Independent Business (NFIB) optimism index rising 2.1 points to 97.4, its first gain since the war began, even as inflation remained the top concern for 21% of firms.

Beneath the averages, the two economies keep diverging. The tax-refund cushion that supported spending earlier in the year is now mostly spent, leaving lower-income households more exposed to any renewed jump in fuel costs. Policy is widening the gap further. Enrollment in the Supplemental Nutrition Assistance Program (SNAP) has plunged five million since the One Big Beautiful Bill Act (OBBBA) took effect, nearly double the 2.8 million the Congressional Budget Office (CBO) had projected at this point. Expectations are now that SNAP outlays are likely to fall about 10% this year rather than 6%, deepening the divide between higher- and lower-income households.

• Key Takeaway: The hard data describe a consumer and a job market in better shape than the mood music implies, with claims at a half-century low and spending revised higher. The strength is real, but it is unevenly shared, and a fresh run-up in gasoline would fall hardest on the households with the least room to absorb it.

Housing, Industry, and the Ledger

Housing spent the month sending mixed signals that mostly netted out to sideways. New home sales rose 1.6% to a SAAR of 628,000 in June, and hefty upward revisions to prior months confirmed that May’s soft reading was a wobble rather than a slide. Prices, though, turned down, as the median new home price fell 3.3% to $398,300 and the annual change slipped negative while buyers shifted toward cheaper homes. Existing-market signals softened as well, with pending home sales sinking 5.4% in June and pointing to a weak July, and homebuilder sentiment on the National Association of Home Builders (NAHB) index fell to 34, a fifteenth straight month below 40 and the longest such streak since the 2011-2012 foreclosure crisis.

The construction data added noise without changing the picture. Housing starts leapt 19% in June, but the entire gain came from the volatile multifamily category, up 76.2%, while single-family starts slipped 0.2%. Building permits, a steadier guide, fell 3%, consistent with starts moving mostly sideways through the second half. Mortgage rates near 6.58%, the highest since August 2025, keep both buyers and builders cautious, and until builders clear their overhang of finished homes, single-family construction has little room to accelerate.

Industry cooled from its strong start to the year. Industrial production rose just 0.1% in June, with manufacturing output flat as the sector hit a soft patch. Business investment, by contrast, is still sprinting, with equipment spending at a breakneck 19% annualized pace in the second quarter. The bright spots remain structural rather than cyclical, as AI-linked computer and electronics production, defense equipment and a recovery in aerospace continue to carry the load, and industrial production is likely to grow 1.2% this year. The inventory cycle offers a quieter source of support, having added an estimated 0.1 percentage point to second-quarter GDP as lean stocks set up a restocking cycle, provided the Middle East conflict does not disrupt it.

The fiscal ledger, meanwhile, tilted further into the red. The federal government ran a $120 billion deficit in June, a swing from a $27 billion surplus a year earlier, as the OBBBA tax cuts eroded revenue and a surge of tariff refunds turned net customs collections negative, with roughly $50 billion paid out in the month. The cumulative fiscal 2026 deficit now runs ahead of the prior year’s pace. Set against that backdrop, estimates are now that the the economy grew a provisional 1.8% annualized in the second quarter, as a jump in imports largely offset a surge in AI-related investment, a reminder that the AI boom lifts spending long before it lifts measured output.

• Key Takeaway: Housing is treading water, factory output has cooled to a crawl and the federal deficit keeps widening, yet none of it points to a stalling economy. Growth is running near 1.8%, with the consumer and AI investment carrying it, while the bill for tax cuts and tariff refunds quietly accumulates in the background.

Final Thoughts

These past two weeks asked whether the economy could pass a battery of tests and shrug off a fresh geopolitical blow at the same time, and the early answer was a qualified yes. Jobless claims fell to a level unseen since 1969, revisions lifted consumer spending, the Beige Book showed almost every district growing and June inflation cooled without broadening. Set against that, the truce with Iran collapsed, the Strait of Hormuz closed again and gasoline began climbing back toward levels that squeeze the very households already stretched thin.

The Federal Reserve meets July 29th into exactly this crosscurrent: data that argue for patience and a supply shock that argues for vigilance. We expect a hawkish hold and a quiet revision to inflation measurement that hands the doves a bit more room. The coming days bring the second-quarter growth reading, the June inflation gauge the Fed prefers, and the Fed’s own decision, a cluster of releases dense enough to show whether the calm in the data can survive the return of the storm.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2607-44