Stocks sizzle on ceasefire extension

A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

The S&P 500 and Nasdaq bounced to record highs on Thursday, and the dollar and Treasury yields fell after the US and Iran agreed to extend their ceasefire, while investors also digested the latest U.S. inflation and revised growth figures.

In my column today, I look at the wedge between core PCE and CPI inflation in the US, a rare phenomenon but one that is likely to become more entrenched in the coming months. This would be a potential headache for new Fed Chairman Kevin Warsh. 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Stagflation

Key U.S. economic data on Thursday neatly encapsulated where the world's largest economy is right now - accelerating inflation and soft growth. Policymakers and consumers are right to be concerned, and talk of "stagflation" will percolate. 

Prices are expected to continue rising, lifted by the AI capex boom and energy shock. The former may support growth, as will the 'wealth effect' from high asset prices. But it's no guarantee, and if growth and employment take a turn for the worse, the Fed is in a bind. 

* Exiled on Main Street

Zooming out, today's data highlighted the contrasting fortunes between businesses and consumers. Corporate profit growth slowed in Q1 but profitability remains near record highs, while the savings rate in April fell to just 2.6%. It has been lower in only one month in the past 18 years.

In crude terms, Wall Street has rarely been in better shape, while Main Street is struggling to keep its head above water. How sustainable is this? Cue renewed debate over the 'K-shaped' economy, wealth taxes, capital vs labor, and inequality.  

* AI smokescreen?

On the subject of intense debate, the AI boom continues to divide opinion. Behind record high stock markets, there is deep skepticism among many investors that the trillions of dollars of AI capex will be matched by sufficient demand, which will lead to huge overspend and overcapacity. 

Microsoft is cutting internal Claude code licenses because it's too expensive, Uber has already burned through its 2026 AI coding budget, and there are much cheaper alternatives coming out of Asia. Few people doubt AI's transformative powers. But has too much investment been brought forward too soon? 

A gap is widening between two key measures of underlying U.S. inflation. Unfortunately for newly confirmed Federal Reserve Chair Kevin Warsh, the one rising faster is the central bank's preferred gauge, further squashing any hope for interest rate cuts.

The Bureau of Economic Analysis on Thursday released April's personal consumption expenditures (PCE) figures, one of two closely watched measures of price changes across a wide range of goods and services. The other is the consumer price index (CPI).

Crucially, a wedge is developing between core PCE, which is now up to 3.3%, and CPI, which is running at 2.8%. It's a rare phenomenon which will trouble policymakers the longer it persists, and frustrate President Donald Trump, who has made no secret of his desire to see rates cut.