Trading Day: Hot inflation cools sentiment

By Jamie McGeever

ORLANDO, Florida, Aug 26 (Reuters) - The dollar and U.S. ‌Treasury yields ticked higher and ​Wall Street treaded ​water on Wednesday after U.S. inflation figures reminded investors that the Fed could raise interest rates soon. Trading ranges were narrow, however, as investors awaited Nvidia's results and looked ahead to a keynote speech from Fed Chair Kevin Warsh later this week.

If you have more time to read, ‌here are a few articles I recommend to help you make sense of what happened in markets today.

1. Nvidia forecasts quarterly revenue ⁠above estimates

2. US inflation remains sticky in July; second-quarter GDP growth unrevised at 1.5%

3. Anxious investors hope for clarity on Warsh's Fed plan at Jackson Hole

4. Bill Gates, alarmed by AI, has policy ideas he wants ‌to discuss with China's Xi

5. Meta agrees to ‌pay $18 billion to settle US lawsuits over children's social media addiction

Today's Key Market Moves

• STOCKS: South Korea +1%, Japan and China +0.5%; Europe, UK and Wall Street all close to flat.

• SECTORS/SHARES: Seven sectors on the S&P 500 fall, four rise. Healthcare -1%, industrials +1%. Moderna -5%, Eli Lilly -4%, Honeywell +2.3%.

• FX: Dollar +0.3%, biggest rise in 2 weeks. Swedish crown -1%, biggest ​fall in 2 months. Colombian peso eyes worst week since April.

• BONDS: U.S. yields rise 1-3 bps, 2s/30s curve flattest close since July Fed meeting. Reasonable 5-year auction - bid/cover ratio 2.37, highest this year.

• COMMODITIES/METALS: U.S. copper futures hit record high $6.75/lb. Oil slips, Brent -1%. Gold -1%. U.S. natgas +3% to 1-month high.

Today's Talking Points:

Hotter in July

U.S. inflation ⁠as measured by the PCE index, the Fed's preferred measure, came in slightly hotter last month than expected. The 0.2% month-on-month increase in headline inflation was above the 0.1% forecast, and the annual rate edged up to 3.7%. ​The unrounded monthly increase in core was 0.246%, close to 0.3%.

Rate hike expectations barely budged, with traders still pricing in a 60-40 probability of a rise next month. The recent signals of intent from Treasury Secretary Scott Bessent to lower bond yields at ​the long end of the curve seem to be working, which may explain the bond market's ‌muted reaction. But there's no doubting it — inflation is sticky. Over to Fed Chair Kevin Warsh and his Jackson Hole address on Friday.

Corporate v. consumer

The second reading of U.S. national accounts released on Wednesday showed that corporate profits as a share of GDP rose to ⁠new record highs in Q2. One measure — there are several ways to slice the data — showed after-tax income increased to 12.1% of GDP. But can consumer spending help maintain those inflated margins?

Spending in Q2 was strong, and it could point to a broader re-acceleration in growth for the second half of the year. But the personal savings rate rose in Q2 to 3.0% from a historically ⁠low 2.6%. This is still extremely low, and suggests consumers will have to rely more on credit than savings in the coming months. Inflation-adjusted spending was flat in July — will that be a ​brief pause for breath, or a more lasting lull?

Watching the chips roll in

Nvidia, the $5 trillion chipmaking AI behemoth, released its latest results after the bell on Wednesday. The world's most valuable company reported Q2 revenue and earnings that beat estimates, and its Q3 revenue outlook was also brighter than the analyst consensus. Interestingly, its Q3 revenue outlook does not include any data center chip ‌sales from China.

But shares fell in post-market trading, by as much as 3%, because the gross margin is expected to dip to 74% in Q3 from 75% in Q2. Essentially, it is costing Nvidia more to generate these bumper revenues and profits. A one ‌percentage point reduction in margins, especially from such an elevated starting point, seems trifling. But could it mark a top, of sorts?

What could move markets tomorrow?

• South Korea interest rate decision

• U.S. ⁠Treasury sells $44 billion of 7-year notes at auction

• U.S. trade (July)

• U.S. weekly ‌jobless claims

• U.S. earnings, including Marvell Technology, Workday, Dollar ​General

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(Reporting ‌by Jamie McGeever;)

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