Michael Reinking:

Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Every week we're here to keep you up to date on the key trends and events driving global markets. We are recording on Thursday afternoon, so let's dive into this week's Market Storylines. Now, last week, equity markets bounced back, recouping a good portion of the post-jobs report losses heading into this week's inflation data, the impending China trade deadline, and a meeting between Presidents Trump and Putin in Alaska on Friday. As had widely been speculated coming out of the most recent round of negotiations in Switzerland, the China trade tariff detente was officially extended for another 90 days. Now, this extension doesn't necessarily signal an all-clear as tensions between the two countries still remain high, but what it does do is push back a sharp increase in tariffs until the fall, giving retailers the opportunity to prepare for the holiday season.

Now, ahead of that announcement, in order to obtain export licenses, chipmakers, NVIDIA and AMD agreed to pay the US government 15% of chip sales to China. Now, this is an unprecedented move by the administration and has drawn quite a bit of criticism, and it may not be a one-off Treasury Secretary Besant suggested this could be a model applied elsewhere. Now, for their part, the Chinese government has urged local tech companies to avoid the chips. However, it is notable that DeepSeek had to delay the release of its new model after failing to train using Huawei chips, highlighting the reliance on US technology. Now, there was a modestly positive reaction within markets to the China developments. The aforementioned chip stocks have traded higher while indices in Hong Kong and China are also up on the week.

Now, the big catalyst of the week and driver of some volatility is this week's inflation data, which for the record is also produced by the Bureau of Labor Statistics, who's had President Trump recently fired. Now Tuesday's CPI report was mixed breaking a streak of better-than-expected reports. Headline was a touch better, but core accelerated of 0.3% month over month and 3.1% on an annual basis. Now, interestingly, the details of the data were opposite of what many had thought with goods inflation looking reasonably tame, but an increase on the services side. Now, there was something in the data for both Doves and Hawks, but the vote by the market was clear that the data would not impede the Fed from cutting after the weak jobs report. Equities rallied sharply with a broadening of the rally into more economically sensitive areas of the market, including small caps and small and mid-cap indices.

Now, however, that rotation got stopped dead in its tracks after this morning's PPI report, which was a bit more jarring. Now, before I dive into this data, I will caveat it by saying it is historically noisy and volatile and not necessarily intuitive as you'll surely agree with as I try to explain the drivers. Now, headlining core PPI we're up to 0.9% for the month well ahead of the estimate, and year-on-year prices were up 3.3% while core PPI was up 3.7%, also a big acceleration from last month. Now, similar to CPI, it was the services inflation, which was the driver, which is a bit perplexing in the current environment.

Now, as warned here is where it gets tricky. Now, final demand services was up 1.1%, the largest increase since March of 2022 and made up over 75% of the overall increases. Now, final demand trade services accounted for over half of the increase rising 2%. Now, this is essentially a measurement of wholesaler and retailer margins and could be where some of the tariff impact is occurring as businesses pass tariff costs onto consumers, which could ultimately feed into CPI later, but contrary to what we've heard on conference calls.

Now, there were also big increases in portfolio management, which is linked to the market performance, and this will likely push PCE estimates higher, but this piece of the equation won't necessarily concern the Fed. Now, final demand goods was up 0.7%, not quite as hot as the service aside, but there were some massive outliers like the 38.9% increase in vegetables, but interestingly, fruits were down 6%. Now we've spent an inordinate amount of time trying to figure out where tomatoes fall in this equation. Now, less alarming was the final demand goods less food and energy, which was up 0.4%, only a modest uptick from the last few months. Now, directionally markets are moving as you'd expect, but the overall response is pretty muted in the context of what we've seen recently.

Equity sold off initially, but most of the weakness is happening in the economically sensitive areas that outperformed earlier this week. In fact, the S&P 500 is back around unchanged as we're recording, helped by the mega cap tech strength. Now treasury yields are up around five basis points across the curve, pretty much reversing this week's move though futures are still pointing to about a 90% probability of a rate cut in September. Now, markets are clearly rationalizing the data, but it will be more interesting to hear how Fed officials are internalizing, which will shine an extra bright light on Fed chair Powell's Jackson Hole speech next week.

Now, there was an expectation that he would use the platform for a more dovish pivot, and this adds a little more suspense. There is much more talk of a hawkish cut with the Fed reiterating data dependence in September. Now, part of the issue is the reliability of the data of itself, which has clearly become a hot button and how to separate the signal from the noise. Now, as we've mentioned many times in the past, it usually does not pay to overreact to a single month's worth of data, and with the government data in question, it'll be increasingly more important to listen to commentary on conference calls, more clues about the economy.

Now, we close out the week with the Russia meeting with President Trump saying there will be a severe consequences if a deal can't be made. Now, retail sales will also be closely watched, but as I just said, I think the corporate commentary is much more important at the moment and next week, we start to hear from the major retailers. Next week's economic data includes the August Flash PMIs and wraps up with Powell's speech on Friday. Now that's going to do it for this week. Thanks for spending some time with us. If you like today's episode, please tell a friend or leave a comment wherever you listen to your podcasts. Thanks for joining me. I'm Michael Reinking, and we'll talk to you again next week.

Speaker 2:

That's our conversation for this week. Remember to rate, review, and subscribe wherever you listen and follow us on X at Icehouse Podcast. From the New York Stock Exchange, we'll talk to you again next week inside the IE House. Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.