U.S. Indexes closed mixed on Wednesday, with the NASDAQ 100 reversing early gains to ultimately underperform. ASML’s earnings initially lifted Nasdaq Futures after the company delivered strong Quarterly results. However, the stock reversed course during the US session after management guided EUV lithography machine sales slightly below consensus expectations, weighing on both ASML and the broader semiconductor sector. Elsewhere, the softer-than-expected PPI report supported the broader market by reinforcing the inflation picture shifting benignly following Tuesday’s CPI release. Sector performance was mixed, with Communication Services and Consumer Discretionary leading the gains, while Energy and Utilities underperformed. Crude prices were volatile but ultimately settled higher as geopolitical tensions remained elevated. The US and Iran continued exchanging strikes, while President Trump warned that Iran’s bridges and power plants would be the next targets should Tehran refuse to return to the negotiating table, adding that energy infrastructure would only be targeted as a last resort. Meanwhile, Iranian Parliamentary Speaker and chief negotiator Ghalibaf stated that Iran was prepared to use both diplomacy and military means to secure the country’s national interests, perhaps signalling a willingness to resume negotiations. However the Wall Street Journal reported that Trump is leaning towards expanding US military operation in Iran, albeit the decision is not final. Elsewhere on the geopolitical front, CBS reported that senior Pentagon officials are quietly examining another potential flashpoint closer to home: Cuba. According to the report, military planners have recently reviewed a range of options, including an Army-led air assault involving thousands of troops from the 101st Airborne Division. However, CBS stressed that the briefings should not be interpreted as an indication that either President Trump or the Pentagon has decided to proceed with any military operation. The softer PPI report added to Tuesday’s Treasury rally, with markets continuing to pare expectations for near-term Fed rate hikes, resulting in a bull steepening of the Treasury curve. In FX, the Dollar underperformed following the softer inflation data, while Sterling outperformed after reports suggested Andy Burnham is leaning towards appointing Shabana Mahmood as Chancellor, who is generally viewed as being more fiscally conservative. Attention now turns to Thursday’s US Retail Sales Report, alongside any further developments surrounding the US-Iran conflict. The June PPI report was softer than expected, reinforcing the benign inflation message from Tuesday’s CPI release. Headline PPI declined 0.3% M/M (exp. +0.3%), reversing May’s 1.1% increase and falling below the lowest analyst estimate of -0.2%. This left annual PPI at 5.5% Y/Y, beneath both the 6.2% consensus and the prior 6.5% reading. Core PPI rose 0.2% M/M, below the 0.4% consensus and the prior month’s pace, leaving the annual core rate at 4.7% Y/Y, below expectations of 5.2% and down from 4.9% previously. Meanwhile, super core PPI (excluding food, energy and trade services) increased just 0.1% M/M, slowing from 0.8% in May, while the annual rate was unchanged at 5.1%. Within the report, the PPI components that feed into the PCE inflation measure were generally encouraging. Portfolio management prices slowed sharply to 0.51% from 4.80%, although air transportation services accelerated to 1.88% from -0.33%. Healthcare-related components were mixed but, on balance, leaned softer. The report provides further evidence that inflation pressures eased in June and supports the view that a near-term Fed rate hike may not be necessary. However, policymakers are likely to remain cautious. Chair Warsh reiterated on Tuesday that the Fed is not out of the woods yet, while Governor Waller said earlier this week that he would need to see several more benign inflation prints before concluding that inflation is sustainably moving back towards target. Oxford Economics noted that lower energy prices were a key driver of the decline in headline PPI and expects another energy-led fall in July. On core prices, the consultancy highlighted that strong AI-related demand continues to support producer prices for technology goods, particularly amid shortages of DRAM memory chips, suggesting inflation in that sector is likely to remain elevated. Following the latest CPI and PPI data, Oxford Economics continues to forecast headline PCE inflation at 3.7% Y/Y, marking a further slowdown from 4.1% in May. The New York Empire Fed Manufacturing Index rose to 15.6 from 5.7, above the expected 8.7. Looking at the breakdown, new orders and shipments jumped to +22.2 (prev. +3.5) and +24.2 (prev. +8.6), respectively, with inventories rising to +4.0 from 0. Prices paid and received encouragingly declined to 52.3 (prev. 61.0) and 27.6 (prev. 31.4), respectively, with employment lifting to +11.4 from 9.6. Unfilled orders increased, delivery times continued to lengthen, and supply availability continued to worsen. Ahead, six-month business conditions dipped to 27.9 from 30.1, with the prices metrics also falling. NY Fed Economic Research Advisor Deltz said, “New York State manufacturing activity increased substantially in July, with new orders and shipments picking up sharply. Employment grew for a sixth consecutive month. Price increases remained elevated, and supply availability continued to worsen. ” Fed Member Williams said with inflation running high, the Fed must restore it to the 2% goal on a sustained basis; the current stance of policy is well positioned to do that. He described inflation as unquestionably too high at about 4% but expects overall inflation to decline to around 3.25% by year-end, continue toward the 2% goal in 2027 and land on target in 2028. He adds that medium- and longer-term inflation expectations remain well anchored. Switching to the labour market, he says it’s showing signs of resilience and stability. He expects the unemployment rate to edge down gradually to 4% in 2028. Meanwhile, Williams expects real GDP growth to be around 2.0%-2.25% this year and over the next two years. In the Q&A section, he noted today’s CPI print was consistent with what he is hoping to see over the coming months; Risks to energy price inflation are somewhat less. Williams sounded against changing the 2% target, ‘Absolutely’ no consideration to changing 2% target. On policy, he does not have a clear direction about which way interest rates are going or when. On a longer-term basis, he expects rates to eventually move down with inflation. Lastly, he said the balance sheet is roughly in range of ample reserves, while broader consumer credit is growing consistently with the economy. Elsewhere, Oil closed higher by a further 1% while Gold was flat.
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