Market Monitor | Mid-Month Update
Headlines and Highlights
- Wholesale inflation rises more than expected: Producer prices rose by the most in three years last month, raising concerns about a potential resurgence of inflation for consumers. The producer price index, considered a good pre-indicator of overall inflation, increased by 0.9% from June in a sign companies are seeing an impact from recently imposed U.S. tariffs. It raised wholesale inflation to 3.3% from 2.3% a month earlier. Core consumer prices, watched closely by Federal Reserve policymakers, climbed to 3.1% from 2.9% — the highest since February.
- Ukraine cease-fire push intensifies: Global investors are watching closely as the U.S. steps up efforts to broker a cease-fire between Russia and Ukraine in the largest war in Europe since World War II. Markets have been little-changed in cautious trading during separate summit meetings between Presidents Donald Trump and Vladimir Putin in Alaska and among Trump, Volodymir Zelensky and European leaders in Washington. A breakthrough agreement, if sustained, could reduce a major overhang on global markets.
- Overseas stocks re-energized as tariff uncertainty eases: International developed stocks added 5.6% in the first half of August as trade deals and settled tariff rates resolved some near-term concerns. The benchmark for international developed stocks, which had underperformed U.S. stocks for three months after a roaring start to 2025, resumed its hot streak and was up 23.9% year-to-date. The S&P 500 gained 1.8% for a gain of 10.5% so far this year. Small caps moved into positive territory for 2025 (+3.3%) with a 3.5% rise. Bonds edged higher as yields declined.
Chart of Interest
Key Takeaways
- Even with the uptick in inflation, we believe the Federal Reserve will lower interest rates next month for the first time since December and again once more by year-end. We expect tariff-induced inflation to be short-lived. Chair Jerome Powell’s speech this Friday at the Fed’s annual conference in Jackson Hole, Wyoming, will be an important indicator of what Fed policymakers do next.
- Consumers have grown more negative about prices but have spent freely throughout the summer, providing a solid foundation for continuing U.S. economic growth. Despite the first drop in consumer sentiment since April, retail sales rose by 0.5% last month on top of an upwardly revised 0.9% increase in June.
- Corporate earnings season for the second quarter, nearly complete, has highlighted the resilience of U.S. corporations amid worries about the coming impact of tariffs. Companies have reported 11.7% higher profits than in the same quarter a year ago, more than doubling initial expectations, according to FactSet.
- The S&P 500 has reached double-digit returns in 2025 despite fears tariffs might derail economic growth. Investors have remained bullish based on companies’ heavy AI-linked capital expenditures and prospects for productivity gains plus the increasing likelihood of interest-rate cuts soon.
- Real estate has continued to lag other investments in 2025, with the Vanguard REIT Index Fund up just 2.6% year-to-date after underperforming the S&P 500 by 20 percentage points (24.9% to 4.9%) last year. Coming interest-rate cuts are likely to benefit this rate-sensitive sector.
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