The Data Picture
This morning's releases - PCE, durable goods, and GDP - point to sticky inflation next to an economy that keeps chugging along with some manufacturing strength. Two ways to read inflation now: look at the major forces, and check for any push to the upside. So far, no upside push for July.
Headline PCE came in a bit hotter than expected, but the core level did not match that. The reading is not consistent with 2% inflation in the near term. Even so, most of the FOMC would not look at this report and see a real case to hike in September.
Pair that with strong economic data. GDP revisions and corporate profits data were both solid, with Q2 corporate profits quite exceptional. The story stays the same: a resilient economy, a sticky inflation problem, and no major new force from energy or a fresh round of tariffs. That tariff force moves into focus over the next couple of months given what is happening with Canada.
Market Reaction and the Wait for Nvidia
The market is holding ground, with the S&P flat, caught between two big catalysts. Traders are waiting to hear from Nvidia (NVDA). On demand, the AI story stays intact, and the EPS growth path looks intact too, so a strong result there would be no surprise. The bigger questions are whether margins get hit and how the memory element plays out for chip companies. Nvidia said it might raise prices, which could matter.
Jackson Hole is the other key event: where the Fed stands, plus last week's decision from Bessent, and how that feeds into Powell's Friday comments.
Between now and the next earnings season in mid-October, several possible landmines sit in the way: the Iran war, economic sanctions being put in place, and any backlash from China. On the positive side, 30-year yields have backed off. Inside the AI space, questions remain about whether data centers can keep getting built on the timeline everyone expects.
The VIX sits at 15. September brings a rough stretch for stocks at times, plus the midterm election. The chance of a pullback between now and mid-October is probably underappreciated.
Tariffs, Imports, and Inflation Math
Renewed tension with Canada is back, and China came up this week with a 7-12% figure. The Canada tariff setup is interesting because a good number of carveouts and exemptions are already in place. Crude and everything energy-related has not really been touched. The tariffs target aluminum, steel, and autos - a much narrower set.
A resurgence of tariff-driven inflation pressure is showing up at the same time that nothing in the AI capex cycle is easing. The math points to continued upward pressure on inflation, or at least less downward pressure. To get back to the inflation peak seen earlier this year, oil would need to move a lot higher, probably closer to $100, since that rate-of-change effect is what would push inflation back up.
On manufacturing, the business investment part of the economy keeps doing really well, but it carries a huge import bias. There is no massive reshoring of US manufacturing and production. Instead there has been a large surge in imports, and in the GDP math imports subtract from the headline growth rate. Imports were revised up for Q2, which is not surprising. As long as the buildout and investment cycle strengthens, the upward trend in import activity stays in place.
Semis and the Buildout Question
In the semiconductor space, it comes down to investment. That means hyperscaler capex budgets, yields, and competition in the debt market, plus the data center buildout - its timeline, estimates, and expectations. Chips have been a bit wobbly, so where that stands is still being felt out.
Demand looks firmly intact. CEO commentary from the Q2 earnings season, including Micron (MU) and others, supports that. The open question is whether the buildout will happen at the rate analysts have estimated. Despite headlines about moratoriums and backlash against data center construction, the market is not pricing in any slowdown in the buildout. That may prove correct, since projects can just be built somewhere else, but that risk is barely being discounted within the AI infrastructure play.
Capex itself could be bullish for the market, though the bearish case depends on who you are. If Nvidia talks up a ramp in Vera Rubin and taking market share, that could be bad news for a name like AMD (AMD).
