Stocks closed lower yesterday after a hotter-than-expected inflation report, and ongoing concerns in the Middle East.

Yesterday's Producer Price Index (PPI) wholesale inflation report showed headline inflation up 0.7% m/m vs. last month's 0.5% and views for 0.3%. The y/y rate rose to 3.4% vs. last month's 2.9% pace. The core rate (ex-food & energy) was up 0.5% m/m vs. last month's 0.8% and estimates for 0.3%. The y/y rate came in at 3.9% vs. last month's 3.6%.

Futures markets sank on the news before yesterday's open. And stayed that way during the regular session.

Losses deepened after yesterday afternoon's FOMC Announcement and Fed Chair Press Conference. Rates were left unchanged, as expected. But they raised their shorter-term outlook for inflation. And that weighed on equities.

In the Fed's SEP (Summary of Economic Projections), they raised their forecast for PCE inflation to 2.7% (up from their December forecast of 2.4%). But the increase was more modest for 2027 at 2.2% (up from 2.1%). The projection for 2028 was unchanged at 2.0%. And the longer-run forecast remained unchanged at 2.0% as well.

For real GDP, the increase was for all periods. They raised their forecast for 2026 to 2.4% (up from their December forecast of 2.3%); 2027 was raised to 2.3% (up from 2.0%); 2028 was raised to 2.1% (up from 1.9%); and their longer-run forecast was raised to 2.0% (up from 1.8%).

The unemployment rate moved only slightly. 2026 was steady at 4.4%. 2027 was increased to 4.3% from December's 4.2% forecast. 2028 was unchanged at 4.2%. And the longer-run rate was unchanged as well at 4.2%.

And the Fed Funds rate projections were largely steady with 2026 staying the same at 3.4%; 2027 remaining at 3.1%; 2028 staying at 3.1%; and the longer-run rate ticking up to 3.1% vs. December's forecast for 3.0%. The 3.4% outlook, and 3.1% outlook implies a rate cut of 25 basis points this year (as expected), and another 25 basis point cut next year (also as expected).

The biggest reason why the market was down, in my opinion, was the continued uncertainty surrounding the campaign against Iran, and their effective closure of the Strait of Hormuz.

In other news, after the close yesterday, Micron reported earnings and posted a positive EPS surprise of 38.6%, and a positive sales surprise of 21.7%. That translated to a quarterly EPS growth rate of 682% vs. this time last year, and a sales growth of 196%. They also significantly upped their guidance for the current quarter (fiscal Q3), with their midpoint EPS forecast coming in 59% higher than the consensus, and their sales forecast up 37% higher than the consensus. If that comes to fruition, that would represent a 902% EPS growth vs. last year, and a 260% sales growth. CEO Sanjay Mehrotra said "Micron set new records across revenue, gross margin, EPS, and free cash flow in fiscal Q2, driven by a strong demand environment, tight industry supply, and our strong execution, and we expect significant records again in fiscal Q3." They were up 0.01% in the regular session, and were trading lower by roughly -1.50% in after-hours trade following earnings. Aside from the muted response, Micron is up 61.8% YTD. And their stellar numbers show the AI trade is alive and well and accelerating.

We'll see how the market reacts today.

Middle East headlines have not been helpful.

But there's plenty of good news to cheer about regarding the economy, and definitely corporate profits. And these can't be ignored forever.

See you tomorrow,