A Market Full of Landmines
Buckle up: We've got more questions on the Trump-Xi trade negotiations, tough talk with Iran, Lockheed Martin stock slipping. Also, a pleasant surprise from the CPI.
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Equity markets made a turn for the worse a little after midday. The day had started off strong enough. There was good news, or at least perceived good news, that had come out of the U.S.-China trade talks in London. By good news, I mean that everyone seemed to get along OK, as both sides tried to put a positive spin on returning trade conditions to what they had been coming out of the talks last month in Geneva.
Additionally, the May consumer price index came in notably cooler than economists had expected. It had been thought that by now, the inflationary impact created by increased tariffs, which are likely still coming, would have started to become more visible. Not so, which is a positive. What could go wrong? Well, plenty. When something does go wrong, it often comes out of left field, or the arena of the geopolitical. That's where we are now.
Buckle Up!
Earlier on Wednesday, as talks between the allies and Iran appear to go nowhere, Iranian Defense Minister Amir Aziz Nasirzadeh made a public comment, "that if negotiations fail, the situation may escalate into conflict."
Nasirzadeh added: "If a conflict is imposed on us, all U.S. bases are within our reach, and we will boldly target them in host countries."
A next round of talks is currently scheduled for this weekend.
Apparently abruptly, U.S. CENTCOM (central command, which includes the Middle East) commander, U.S. Army Gen. Erik Kurilla, who was supposed to testify on Capitol Hill on Wednesday, cancelled that appearance and returned to Tampa, Florida, which is where CENTCOM is headquartered.
The U.S. State Department ordered the departure of nonessential personnel from the embassy in Baghdad, Iraq, as well as from Bahrain and Kuwait. The Department of Defense also authorized the voluntary departure of military dependents across the entire region. During the day, Pres. Trump had said during a podcast that he was becoming "less confident" in reaching a deal with Iran. On Wednesday evening, the president commented on the removal of military dependents from the theater, They are being moved out because it could be a dangerous place, and we'll see what happens. They (Iran) can't have a nuclear weapon."
Nearly simultaneously, the U.K. Maritime Trade Operations, which is a British security agency, issued an advisory, warning commercial vessels in the Persian Gulf, Gulf of Oman and the Strait of Hormuz that tensions in the area could escalate and directly impact maritime operations. Obviously, crude oil prices spiked on the developing story, and US equities came well off of their daily highs. Multiple sources are also reporting that Israel may be ready to launch a military operation into Iran.
Anyone Notice Lockheed Martin?
RTX RTX was up 2.38% on Wednesday and L3Harris LHX was up 0.77%. while Northrop Grumman NOC closed close to unchanged, but Lockheed Martin LMT gave up 4.26%? It has been several months since I told readers that I was getting out of my former long-time holding LMT. This is part of that "why."
On Wednesday, reports circulated that the U.S. Air Force is seeking funding for 24 new F-35 fighter aircraft, which is half of the 48 that had been projected. This likely reflects Defense Sec. Pete Hegseth's efforts to get defense spending under control, which is probably a good idea. This reduction is not a done deal until Congress has its say as the legislature actually runs the appropriations process.
Loving U.S. Debt?
At least they do when "they" are nervous. On Wednesday, the U.S. Treasury went to market with $39 billion worth of new Ten-Year Notes. The high yield awarded was 4.421%, which stopped through the "when issued" by 0.7 basis point. This was the fourth consecutive "stop through" for this series.
The internals were strong. Indirect bidders (foreign accounts) took down 70.6% of the issuance, while direct bidders (U.S. accounts) took home 20.5% of the auction. This left just 9% for dealers, which may or may not be enough to cover their needs. This was the third lowest slice of the 10-Year Note pie that dealers were "stuck with" in the history of the series. The strength of this auction may have come as something of a relief after what had been seen as a sloppy auction of Three-Year Notes on Tuesday.
Trade? There's More...
While the takeaways from the London meetings between the U.S. and Chinese trade teams was generally positive, it was learned later that Beijing had put a limit on what that side had conceded during the talks. China will put a six-month limit on licenses granted to export rare earth minerals to U.S. automakers and other manufacturers.
This was the key point of need for the U.S., and what this makes clear is that China is reserving the right to escalate tensions again down the road, when that side thinks that the nation may need something. The U.S. has been reported to have eased some restrictions on the sale to Chinese customers of jet engines and engine parts as well as ethane.
It's no secret that what Beijing is really after is AI-capable semiconductor chips. The latest offerings being designed by both Nvidia NVDA and Advanced Micro Devices AMD are at least a generation ahead of what is being produced by Huawei and other Chinese chip designers.
A Very Friendly CPI
For May, U.S. consumer prices were expected to reflect the first signs of tariff-related inflation. Not yet, they're not. For the month, both headline and core consumer prices were up just 0.1% from April vs. projections for 0.2% growth at the headline and 0.3% growth at the core. On a year-over-year basis, headline CPI crossed the tape at growth of 2.4%, up from 2.3% in April, but below expectations for growth of 2.5%. Core CPI landed at growth of 2.8%, flat from April and also below expectations (for growth of 2.9%).
What was hot? Fuel oil, electricity, and medical care commodities put upward pressure on consumer prices in May. What was cold? Transportation services, apparel, new and used cars, and most commodities put downward pressure on consumer prices. What was ice cold? Gasoline prices were down 2.6% month over month in May and are now down 12% year over year.
Pres. Trump jumped on this report like a Charlie Hough fastball and called for a one-percentage point rate cut that will almost certainly fall on deaf ears. Fed Funds Futures are still pricing in close to a 100% probability for no change in interest rate policy to be made by the Federal Open Market Committee next week. A 74% likelihood for a quarter-percentage point rate cut is currently being priced in for Sept. 17.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 240K, Last 247K.
08:30 - Continuing Claims (Weekly): Last 1.904M.
08:30 - PPI (May): Expecting 0.2% m/m, Last -0.5% m/m.
08:30 - Core PPI (May): Expecting 0.3% m/m, Last -0.4% m/m.
08:30 - PPI (May): Expecting 2.5% y/y, Last 2.4% y/y.
08:30 - Core PPI (May): Expecting 3.1% y/y, Last 3.1% y/y.
10:30 - Natural Gas Inventories (Weekly): Last +122B cf.
1:00 p.m. - Thirty-Year Auction: $22B.
The Fed (All Times Eastern)
Fed Blackout Period.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: ADBE (4.97), RH (-.07)
At the time of publication, Guilfoyle was long NVDA, AMD, RTX, LHX, NOC equity.
