Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

A surprise spike in U.S. producer price inflation took the wind out of stock markets' sails on Thursday and prompted investors to reassess their view that an interest rate cut next month was a near certainty.  

More on that below. In my column today I look at five charts that show the foundations underpinning the U.S. economy and Wall Street may be shakier if you strip out the AI- and tech-related spending. 

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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* The Fed outlook. Rates traders trimmed the probability of a quarter-point rate cut next month to 90% from 100% after the release of July's producer price inflation data. Core annual PPI shot up to 3.7%, the highest in three years. Excluding pandemic distortions, the jump from June's 2.6% was the biggest since comparable data was first gathered in 2011.

Talk of a 50-basis point cut next month, partly fueled by Treasury Secretary Scott Bessent on Wednesday, has evaporated. The PPI data ensured that, but Bessent also rowed back a bit on Thursday. Another couple of solid inflation and employment reports, and could a September cut be taken off the table completely? 

* European GDP. The first estimate of Q2 UK growth was released on Thursday and broadly speaking, the 0.3% expansion was better than expected - or not as bad as feared, depending on your view. Indeed, Britain's economy grew nearly twice as fast as the U.S. economy in the first half of the year. 

Euro zone GDP was less stellar, with a slump in industrial production in June and downward revision to May capping overall GDP growth in the April-June period at just 0.1%. That marked a clear slowdown from 0.6% expansion in the first quarter.

The elephant in the room, of course, is the impact of tariffs, which has yet to be fully felt, suggesting the second half of the year is likely to be bumpier than the first. 

* Do you want to make a deal? Donald Trump and Vladimir Putin meet in Alaska on Friday, with the U.S. President saying his Russian counterpart is keen to "make a deal" on Ukraine. The aim of Friday's talks is to set up a second meeting including Ukraine, and perhaps agree the framework for a ceasefire.

Despite his harsher tone toward Putin over the past months, Trump has a long history of trying to placate the Russian leader. The Trump administration has sought to temper expectations, and White House press secretary Karoline Leavitt told reporters on Tuesday the meeting would be a "listening exercise." 

That's probably not what Ukrainian President Volodymyr Zelenskiy wants to hear. 

The U.S. economy seems to be chugging along fairly smoothly, if a little too slowly for some observers' liking. Under the bonnet, however, the picture is more worrisome, and the risk of engine malfunction is rising. 

Technology's role in the U.S. economy has never been greater, and artificial intelligence could deliver a historic productivity boom. But return on the huge investment being made on that bet could take years to materialize. What's more, an unbalanced economy may not be desirable in the long term, as it can lead to poor investment and policy decisions. 

Below are five charts that indicate the foundations of the resilient U.S. economy and booming stock market may be much shakier than they appear, especially if AI- and tech-related spending, investment and optimism are stripped out.

INVESTMENT

Inflation-adjusted investment in 'AI-sensitive' sectors of the economy since the end of 2019 has risen 53%, notes Troy Ludtka, senior U.S. economist at SMBC Nikko Securities. Investment elsewhere has inched up just 0.3%.