Wall Street on Friday made solid gains for the week, helped by raised expectations for the Federal Reserve interest rate cut in September. July core consumer price index (CPI) came in at 2.7%, unchanged from June while the producer price index (PPI) readings were significantly higher than expected increasing by 0.9% from a month ago bringing it to 3.3%. Both sets of data showed the effect of Donald Trump’s tariffs on prices. The large spike in the producer price index (PPI) shows that inflation is coursing through the economy, even if it hasn’t been felt by consumers yet.
The TACO (Trump Always Chickens Out) trade continued in the stock market as another deadline was extended this week in Donald Trump’s continuing trade negotiations with countries from around the world. This time, the hard stop for a deal with China was pushed to Nov. 9 as the two sides continue to wrangle over terms after a third meeting in Stockholm last month. That means the tariff rate on U.S. imports from China will remain at 30%, rather than rise to a higher level, at least for now. Trump also said Monday he would not impose a tariff on imported gold, potentially good news for Switzerland, the world’s largest gold refining center.
For the week, the S&P climbed 0.9%, while the Nasdaq gained 0.8%. The Dow added 1.7%.
Future Wealth’s View
The rising PPI reading is a harbinger to rising prices of goods and services and a higher CPI. And it’s not just American consumers who are set to pay for Donald Trump’s trade war. Small US companies, critical to the economy as a source of more than half of its job creation, are about to get clobbered, too. The interest rate cut in September could alleviate some of the pain but a decline in consumer spending and slowdown in the US economy could be imminent.
The one sector that could benefit from the interest rate cut would be homeownership. Americans have been priced out of homeownership at record rates. Across the US, the costs of purchasing a home have compounded from a lack of new construction since the 2008 financial crisis, an effect of homeowners unwilling to relinquish low rate mortgages plus a higher interest rate environment that make buying and building more expensive.
While the stock market continues to move higher, we believe that the first clear signs of a slowdown in the economy could mark the beginning of a sell off in stocks as the market takes a breather to bring it down to levels of normalcy in valuation. That day may not be too far off.