Nasdaq 100: ON Semiconductor, Microchip Technology Lead Rally on CPI Data
News Summary
The Nasdaq 100 surged to a fresh high as softer-than-expected Consumer Price Index (CPI) data fueled expectations for a Federal Reserve rate cut next month. Technology stocks, particularly chipmakers like ON Semiconductor, Microchip Technology, and NXP Semiconductors, led the gains, all advancing over 6%. Small caps outperformed significantly, with the Russell 2000's percentage gain nearly triple that of the S&P 500. Financials, energy, and communication services were also strong sectors, while real estate and utilities traded lower. Despite the increased rate cut bets, Treasury yields edged higher, with the 10-year and 30-year yields rising modestly. On the trade front, President Trump extended a 90-day pause on higher tariffs with China, allowing for further talks. Markets now look to Thursday's Producer Price Index (PPI) and the upcoming Jackson Hole symposium.
Background
July 2025 Consumer Price Index (CPI) data showed headline CPI rising 2.7% year-over-year and core CPI increasing 3.1% year-over-year, both slightly below forecasts. This significantly boosted market expectations for a Federal Reserve rate cut in September, with the probability climbing to nearly 91% according to CME's FedWatch Tool. UBS strategists also anticipate a total of 100 basis points in rate reductions by year-end, starting in September, viewing the combination of easing rates and improving earnings as a favorable backdrop for equities. Furthermore, US President Donald J. Trump has extended a 90-day pause on higher tariffs with China, aiming for further trade talks, which provides a slight easing in the trade policy outlook for markets.
In-Depth AI Insights
Is the market's optimistic pricing for Fed rate cuts overly aggressive, especially given the divergent behavior of Treasury yields? - The market's aggressive 91% probability for a September rate cut might be overstretched. While headline CPI softened, core CPI remains sticky at 3.1%, and the counter-intuitive rise in long-term Treasury yields suggests the bond market may still harbor doubts about inflation's persistence or the Fed's ultimate tightening stance. - This divergence hints that if inflation data proves resilient or economic growth strengthens unexpectedly, the Fed might not cut rates as rapidly as the market anticipates, potentially triggering a market correction. The rise in long-term rates could also reflect concerns about future fiscal expansion or government debt burdens, limiting the Fed's room to stimulate via cuts and challenging a soft-landing narrative. Semiconductor stocks are leading the rally on easing rate expectations; how sustainable are their valuations and fundamental support? - While the semiconductor sector benefits from rate cut expectations and robust chip demand, its cyclical nature and high valuations warrant caution. The current market optimism might be overly pricing in valuation expansion from lower rates rather than significant long-term improvements in fundamental earning power. - Despite solid demand trends, risks such as global economic slowdowns, escalating geopolitical tensions, and potential supply chain volatility remain. Investors should closely monitor chip inventory levels and end-market demand shifts to ascertain if the current rally can translate into sustainable earnings growth. Given ongoing global trade tensions, what are the true intentions and long-term implications of the Trump administration's extension of the tariff pause with China? - The Trump administration's extension of the tariff pause is likely a tactical move to foster a more positive atmosphere for upcoming trade talks or to avoid unnecessary market volatility ahead of economic data releases. It does not signify a fundamental de-escalation of trade tensions but rather a tactical pause, not a strategic pivot. - In the long run, despite short-term relief, US restrictions on China in high-tech sectors and trade barriers remain structural issues. Investors should focus on whether this translates into deeper industrial policy adjustments and the long-term impact on global supply chains and companies reliant on US-China trade, rather than solely on the temporary tariff pause.