Inflation came in as expected, but Hormuz kept a lid on stocks

Good morning. July consumer prices rose 3.4% from a year earlier, exactly what forecasters expected and a touch below June's 3.5%. Energy, gasoline and food prices all fell over the month, holding inflation down, and core inflation, which strips out volatile items, came in at 2.5%, tied for the slowest pace since March 2021. Prices are still about a full percentage point above where they stood before the Iran war.

The report eased pressure for a September rate hike but did not settle what comes after. Bank of America stuck to its call for three hikes this year, while Pimco expects a hold in September. Together with last Friday's weak jobs data, it leaves Fed officials weighing inflation against employment again.

Stocks rose during the day on the tame inflation reading and strong AI earnings, but Middle East news held them back and the close was mixed. Ship traffic through the Strait of Hormuz fell to a three-month low, and Iran said it will not fully reopen the strait until Washington meets its demands. President Trump hit back, saying the U.S. controls Hormuz, and talks stalled.

There are heavier weights beneath the surface. The U.S. July budget deficit was $432.3 billion, the largest since March 2021, and warnings are growing that the $30 trillion Treasury market faces rising yield risk. Even with the index at a record, more investors are buying options to protect against a sharp drop.