Wentz Weekly: US/China Agreement, Mideast Tensions, and Lower Inflation

Wentz Weekly Insights
US/China Agreement, Mideast Tensions, and Lower Inflation

President Trump announced a trade deal with China was done pending final approval, Apple lacked any major artificial intelligence updates at its developers conference, another Boeing airplane crash led to more worries about the plane maker, the release of the latest inflation data was a non-event, and rising unrest between Israel and Iran were the major headlines last week. There was some good news in there with progress on trade and a lower-than-expected inflation report, but the rising Middle East tensions led markets slightly lower for the week.

The S&P 500, the best performing index of the major four, fell 0.39% for the week while small caps continue to be the worst and down around 5% year-to-date (compared to the S&P 500’s 2% gain). Energy was the best performing sector on the week due to the 13% increase in crude oil stemming from the missile strikes in Iran. Markets are already giving back some of those gains as it becomes clear the strikes avoided oil producing facilities. Meanwhile, Treasuries were stronger with yields falling and giving back the increase from the week prior.

The first half of the week was dominated by US and China trade talks that took place in London. After more than two day of negotiating, Trump said an agreement was made although there have still been no specifics. Reports saw the agreement includes China speeding up its exports of rare earth minerals, which has been a sticking point for the US, while the US will allow Chinese students to attend American universities. Some analysts have said the agreement only confirmed what each side agreed on at the previous round of talks in Geneva. While a step in the right direction, there is still no official deal and when there is both Presidents need to sign off.

Other trade headlines have noted the difficulty of negotiations, particularly as the July 9^th date approaches – when the 90-day pause on reciprocal tariffs expire.

Then the inflation report mid-week took many headlines but did not impact markets much. The consumer price index increased just 0.1% in May which was lower than the 0.2% increase that was expected. Energy prices continue to put downward pressure on the index, with prices of the energy category down 1.0% in the month, due to lower oil prices. The core index, which excludes food and energy, rose 0.1% and was lower than the 0.3% increase expected. The annual rate in the core index was 2.8%, matching the annual increase from April.

Services prices, where inflation has been the highest since the pandemic, was up 0.2% in the month and up 3.5% over the past year, down from the rate in 2024, but reaccelerating after being at 3.3% in April.

It does not appear tariffs have had an impact of inflation, whether that will be the case for the remainder of the year is anyone’s guess. Some economists believe it will take months before tariff impacts are felt while others believe inflation will be unaffected by tariffs. The markets were slightly lower after the inflation report came out.

Most of the markets decline last week came Friday in what turned into a big risk off day due to rising geopolitical tensions. Late Thursday Israel conducted airstrikes on Iranian nuclear and military facilities, targeting its nuclear sites, nuclear scientists, and senior military officials. Israel said the operations will take as many days as needed to remove the threat. The US and Iran have recently undergone talks with Iran on deterring its ambition to build nuclear weapons and stop its stockpiling of uranium, but it seems talks stalled prior to Israel’s moves. 

Then Friday Iran retaliated, launching missiles in one of Israel’s most populated city Tel Aviv, with most missiles blocked by the air defense system the Iron Dome. Reports are saying the strikes caused little damage.

This created a big risk off day Friday over the uncertainty and whether or not the US or other developed countries would get involved. However, early Monday stocks are moving higher over a potential de-escalation after it appears Iran is asking the US to convince Israel to agree to a ceasefire.

The back and forth on trade, particularly with the trade deadline approaching and the unknown impact to company earnings, the budget bill still in the works, the uneven and inconsistent economic data, and rising geopolitical tensions create a lot of uncertainty for the markets which we think will lead to continued volatility. Markets are pushing record highs, just 2% off, after rising nearly 20% from the April lows which may lead to a breather for markets.

This week we look ahead to the next Fed meeting with a policy announcement Wednesday afternoon. We do not expect any changes in interest rates but will see an update of Fed official’s economic projections, the first since the Liberation Day tariff announcement. While the earnings calendar is very light, other events include retail sales data and the G7 political summit hosted by Canada. 

Week in Review:

Stocks indexes were all lower last week after a bigger down day on Friday with the major indices finishing as follows: S&P 500 -0.39%, Nasdaq -0.63%, Dow -1.32%, and Russell 2000 -1.49%. Treasuries were higher as yields fell across the curve as investors were more risk-off (buying safe haven assets like government bonds, i.e. Treasuries). The 2-year Treasury yield fell 9 basis points to 3.96% while the 10-year yield fell 10 bps to 4.41%. The dollar index fell 1.02% despite the geopolitical tensions but gold did rise 3.27% to new record highs. Bitcoin increased 1.63%. Crude oil saw its biggest gains since 2022, rising 13% on the week due to Middle East tensions. 

Recent Economic Data

• Consumer Price Index: The consumer price index increased 0.1% in May, slightly lower than the 0.2% increase that was expected. The index is up 2.4% from a year ago, up from 2.3% in April but below the 2.5% change expected. Food prices increased 0.3%, up 2.9% over the past year, while energy was one of the categories bringing the overall index lower with a 1.0% monthly decline and down 3.5% over the past year. Excluding these two volatile categories, core inflation increased 0.1%, lower than the 0.3% increase expected. Core inflation is still up 2.8% from a year ago which matches the annual increase from April. New and used vehicles saw price declines for the third straight month with apparel prices were lower as well and down 0.9% over the past year. Shelter prices, the largest category, slowed to a 0.3% monthly increase, up 3.9% over the past year. Airfares were down 2.7% in May and down 7.3% over the past year. Finally, services prices (excluding shelter) increased 0.2% and are up 3.5% from last year, reaccelerating from the 3.3% increase the month prior.

• Producer Price Index: The producer price index increased 0.1% which was slightly lower than the 0.2% increase that was expected. Prices for final demand goods were up 0.2%, and up 0.2% excluding food and energy. Prices for final demand services were up just 0.1% with transportation and warehousing seeing a decline and trade up 0.4%. Compared to a year ago producer prices are up 2.6%, accelerating from 2.4% last month, with core prices up 2.7%, slowing from 2.9%.

• Jobless Claims: The number of unemployment claims the week ended June 7 was 248,000, unchanged from the week prior which is about 25k above the average so far this year. The four-week average increased 5k to 240,250. The number of continuing claims increased 54k to 1.956 million for the highest since November 2021 with the four-week average up 20k to 1.916 million.

Company News

• Warner Bros. Discovery: Warner Bro. Discovery announced it will split into two companies. Its studio business with the HBO Max streaming service and HBO Network (as well as Warner Bros Motion Picture Group and DC Studios) will be under one company and the traditional cable network (like the Ted Turner based networks such as CNN, TNT, TBS, as well as Discovery, etc) will be under another company. The split comes just three years after Discovery purchased WarnerMedia from AT&T to form Warner Bros. Discovery. The company said the split was to better align with shareholders based on each business’ individual dynamics and growth prospect.

• Meta: It was reported Meta CEO Zuckerberg has become increasingly frustrated with the quality of and the response to its Llama AI model and as a result is personally leading the hiring of a new team of experts to advance the efforts.

• Qualcomm: Qualcomm announced it will acquire London based Alphawave IP, maker of high-speed semiconductors and connectivity technology used in data centers and AI applications, for $2.4 billion. The purchase was a 96% premium over where shares traded prior to the report of a possible acquisition. Qualcomm said the purchase will help expand its technology for artificial intelligence and lessen its reliance on the smartphone market where growth has slowed.

• Boeing: Boeing shares moved lower after a Boeing jet crashed in India overnight Wednesday. While the cause of the accident is not known yet, early reports indicate it may have been due to a double engine failure. The engines were manufactured by GE.

• IBM: IBM said it is building a quantum computer, called Starling, capable of being “fault tolerant,” which would be the first in the world. It does not expect to launch the super computer until 2029. The quantum computer is expected to perform 20,000 more operations than today’s quantum computers and will solve problems that would take today’s computers billions of years.

Other News:

• Tariffs:
  • There were no real headlines after US/China meeting in London Monday. Some reports said the US is willing to ease export restrictions to China if China increases and speeds up exports of rare earth minerals. Talks continued on Tuesday and a “framework deal” was agreed on late Tuesday.
  • Details are very limited but early reports say the US will see increased exports of rare earth minerals and tariffs on Chinese goods will increase to 55%, an increase from 30% that was set in the May trade talks. In return the US will allow Chinese students to attend American universities. There are still limited details and it is not finalized until President Trump and President Xi sign off on it.
  • The US Court of Appeals ruled Trump’s tariffs under IEEPA can stay in place while the appeals process plays out.
  • Trump said he will decide on unilateral trade terms within the next two weeks and will be sending out letters to trading partners after he decides, ahead of the expiration of the July 9 reciprocal tariff delay. Trump said the letter is going to be “telling them what the deal is” and that countries can take it or leave it. He also said he is open to extending the tariff delay for countries that negotiate in good faith.
  • Trump indicated me might increase tariffs on imported automobiles soon in effort to boost domestic auto manufacturing.