Producer costs are available nicely above estimates… Wall Road nonetheless expects a price minimize in September… is a melt-up/bubble burst within the playing cards?… lower-income People maintain falling behind
The second of this week’s two inflation experiences got here in unexpectedly sizzling this morning.
Analysts had forecast the Producer Value Index (PPI), which measures wholesale costs, to climb 0.2% in July – as a substitute, it soared 0.9%. This was the largest month-to-month enhance since June 2022.
For the 12 months, headline PPI inflation jumped to three.3%, nicely above the prior month’s 2.4% quantity.
Core PPI, which strips out risky meals and power costs, rose 0.9%, triple the forecast of 0.3%.
Not good.
Certainly, with this unexpectedly sizzling inflation print, the chances of a September price minimize can be plummeting, proper?
In any case, who may count on the Fed to chop beneath these situations?
Just about everybody.
The CME Group’s FedWatch Software reveals that, regardless of this morning’s sizzling numbers, the chances of not less than one quarter-point price minimize in September have solely fallen from yesterday’s 100% expectation to 92.5% as I write.
In the meantime, regardless of the disappointing knowledge, shares are mainly flat as of early afternoon.
This subdued response probably stems from a number of elements:
- Wall Road is focusing extra on Tuesday’s cooler CPI print
- Some merchants are blaming a lot of the uptick on a pointy rise in “portfolio administration” prices and better airfare costs. Stripping out these parts, the numbers would have landed a lot nearer to expectations
- Firms have proven adaptability in managing rising prices to date and are seeing sturdy earnings – partly pushed by investments in AI. So, some buyers are simply shrugging off this knowledge
- Some argue/hope that the Fed’s most popular inflation gauge, the core PCE value index, may not present as important a bounce because the PPI when it comes out later this month.
Regardless of the reasoning, it seems that Wall Road stays satisfied {that a} September minimize is coming, so the bulls stay in cost.
Will a brand new rate-cutting marketing campaign put us on the trail of an asset value melt-up… inflated bubble… and horrendous crash?
Elements of the economic system may gain advantage from a price minimize – there’s little question about it.
However for different elements – and, notably, the funding markets – rate of interest cuts will probably be like mainlining sugar right into a toddler already bouncing off the partitions.
Right here’s a enjoyable meme from analyst Charlie Bilello illustrating:
Supply: @CharlieBilello
In the event you can’t learn it, Bilello rattles off all the pieces at present at all-time highs: shares, houses, Bitcoin, gold, cash provide, nationwide debt…
He then highlights how inflation is miles above the Fed’s goal price – and but we’re on observe for an rate of interest minimize.
Let’s go to our hypergrowth professional, Luke Lango, for the way this performs out. From his Innovation Investor Day by day Notes earlier this week:
Charge cuts are coming.
Ultimately, we’ll minimize an excessive amount of, too quickly, and inflation will make a comeback, and this complete AI Increase will finish in a large AI Bust.
That’s how this rodeo all the time performs out. Don’t child your self into considering this time is totally different.
However we aren’t at that time but – and nonetheless removed from it, in our view.
We consider we nonetheless have one other 12 to 24 months of completely blockbuster runway forward for AI stocks. Throughout this time, AI stocks will keep lapping the market and the gains will get more and more concentrated in a select handful of stocks.
Luke’s ensuing playbook is easy…
Deal with the AI firms on the forefront of technological progress and ignore all the pieces else.
(For the most recent AI shares that Luke is recommending alongside Louis Navellier and Eric Fry, click here to learn more about their favorite Physical AI/robotics picks.)
A have a look at that “all the pieces else”
As we detailed in our August 5 Digest, though the S&P 500 and Nasdaq Composite are buying and selling at file highs, most particular person shares are nowhere close to their very own information.
This return differential is because of the outperformance of a handful of mega-cap tech leaders that exert a heavy affect on the indexes. Earlier at the moment, MarketWatch put some numbers on this:
The S&P 500’s rebound from its “liberation day” lows was largely due to the huge run-up of simply 4 Large Tech names as artificial-intelligence enthusiasm once more gripped markets.
Nvidia Corp., Meta Platforms Inc., Microsoft Corp., and Broadcom Inc. have contributed a mixed six share factors to the S&P 500’s complete year-to-date appreciation of 10%, in response to a observe from DataTrek Analysis.
Which means 60% of the index’s positive aspects are from these AI megacaps, highlighting simply how slender the inventory market has turn out to be.
(Disclaimer: I personal MSFT.)
However if you look past these leaders, a really totally different actuality emerges.
Luke factors out that lower than 5% of particular person shares are at 52-week highs.
Clearly, management is extremely tight. In truth, in response to analysis store Apollo, the High 10 shares now make up roughly 40% of the S&P’s complete worth – close to a contemporary file.
In the meantime, breadth is middling, not roaring. MacroMicro factors out that solely about 60% of the shares in S&P sit above their 50-day shifting common. And solely round 56% to 61% are above their 200-day shifting averages – that’s nicely beneath the 70% to 80% readings you’d count on in a wholesome, widespread market surge.
And small-cap shares – one of many greatest canaries within the coalmine – have largely sat out this newest bull run. Regardless of periodic bursts, the Russell 2000 is up lower than 3% this 12 months. That’s a world away from the S&P’s 10% return and the Nasdaq’s 13% acquire.
Backside line: This market’s shine is coming from a small cluster of mega-caps doing a lot of the heavy lifting. The remainder of the market is looking for its footing.
Now, a price minimize ought to assist these lagging shares, however the place we actually want the assistance is the lagging lower-income American.
Circling again to the “elements of the economic system may gain advantage from a price minimize”
Yesterday, CNBC featured the next headline:
1 in 5 laid-off staff submitted over 100 functions earlier than discovering a job, says new report
In the event you’re a Fed watcher, this isn’t shocking. Fed Chair Jerome Powell himself stated:
It’s a low hiring surroundings. So, when you’ve got a job, it’s all good.
But when it’s important to discover a job, [the] hiring charges have come down.
Apparently, Powell stated this all the best way again in January – and we’re not in higher form at the moment.
We’ve spilled loads of ink discussing the “haves” versus the “have nots” divide in at the moment’s economic system. Whereas the asset costs of the “haves” retains hovering (as we noticed within the meme a second in the past), the monetary situation of the “have nots” retains deteriorating.
Final week, the Related Press lined an AP–NORC ballot that discovered about 4 in 10 People beneath age 45 are utilizing “purchase now, pay later” (BNPL) providers – not for big-ticket purchases – however for leisure, consuming out at eating places, and even groceries.
In the meantime, the variety of student-debt debtors who’re falling into delinquency is rising.
Right here’s Yahoo Finance from Saturday:
Of the nation’s mixture pupil debt, 10.2% was reported as greater than 90 days delinquent within the second quarter of 2025, in response to the Federal Reserve Financial institution of New York.
12.9% of pupil loans entered severe delinquency in that point interval, the best price in 21 years of information.
And it’s not simply youthful People contemporary out of faculty who’re having hassle. Yesterday, we realized that older People with pupil debt are falling behind.
Right here’s CNBC:
Almost 1 in 5 — or roughly 18% — of pupil mortgage debtors who’re 50 and older turned “critically delinquent,” or 90 days or extra late on their funds, within the second quarter of 2025, in response to the Federal Reserve Financial institution of New York.
It’s the identical factor once we flip to housing. Mortgage delinquencies for lower-income People are headed the flawed route.
From MarketWatch, final week:
Although FHA mortgages — usually utilized by first-time and lower-income patrons — solely make up about 12% of mortgage balances, the delinquency price on these loans has been the steepest.
Almost 40% of debtors with an FHA mortgage had missed a single fee — greater than the share of FHA debtors who did so earlier than the pandemic, within the first quarter of 2019, New York Fed researchers stated…
If youthful individuals are “drowning in debt” and the labor market begins to crack, “this will get uglier quick,” Orphe Divounguy, an economist at Zillow wrote.
And but, within the background, Wall Road and asset costs maintain climbing.
Although at the moment’s jobs market – general – stays moderately secure/sturdy, the rising disparity between the “haves” and “have nots” has shades of this notorious screenshot taken throughout the funding TV present Mad Cash again within the Covid-19 disaster.
Supply: Mad Cash
What to search for subsequent
Tomorrow brings the U.S. Retail Gross sales report, the place we’ll get extra colour on the situation of the American shopper.
From a lower-income shopper perspective, we’re in search of knowledge suggesting power – not less than stability.
However from a market perspective, legendary investor Louis Navellier goes the opposite method.
From yesterday’s Growth Investor Flash Alert:
We’re going to get retail gross sales [tomorrow].
I’ll be trustworthy with you, you actually don’t need a good retail gross sales report, as a result of it may trigger the Fed to pause or hesitate or solely minimize 25 as a substitute of fifty.
However let’s see what it says.
Now, you might need simply raised an eyebrow…
Fifty foundation factors of cuts?
Yep. And if Treasury Secretary Scott Bessent has his method, that’s simply the beginning.
Again to Louis:
[Bessent has] referred to as for the Fed to chop key rates of interest 150 foundation factors, commencing with a 50-basis level minimize at its September FOMC assembly.
Particularly, Bessent stated, “I believe we may go right into a sequence of price cuts right here, beginning with a 50-basis level price minimize in September.”
After which he went on so as to add that in the event you have a look at any mannequin, it means that we should always most likely be 150–175 foundation factors decrease.
And this brings us again to the query we requested earlier at the moment…
Will a brand new rate-cutting marketing campaign put us on the trail of an asset value melt-up… inflated bubble… and horrendous crash?
Probably, sure – particularly if Bessent will get his method and a number of cuts are on the desk.
And that is the paradox the Fed is strolling into: one economic system powered by AI leaders and file asset costs…
The opposite economic system weighed down by greater prices, rising delinquencies, and restricted job prospects.
Charge cuts will attain each, however with very totally different – and infrequently opposing – results. So, within the months forward, it is going to be important to trace how cuts have an effect on each side.
If decrease charges fail to ease strain on lower-income households whereas inflating asset bubbles, historical past suggests a painful correction will observe.
However for now, even after this morning’s sizzling inflation knowledge, Wall Road is betting that the Fed is about to spike the punchbowl on this market celebration – notably for a small group of AI leaders.
As Luke reminds us, this AI Increase finally will finish in a large bust… however we’re not there but…
Have night,
Jeff Remsburg
