Semis Suddenly Slump, Trump Meets Xi, Inflation Heats Up, Warsh on Way

Pres. Donald Trump will be in Beijing this morning for two days of visits with mainland Chinese Pres. Xi Jinping. This will be the seventh face-to-face meeting between these two leaders, but the first visit by this or any U.S. president to China in almost nine years. The presidents, who preside over the two largest economies on the planet, will tour the Temple of Heaven and then hold talks in the Great Hall of the People.

Trade between the two powers is expected to top the list of items to be discussed as will the thorny issue of Taiwan. Taiwan, or the island of Formosa, is an autonomously governed province claimed by the mainland as a part of China, despite operating its own armed forces, running its own elections and its traditional military alliance with the U.S. Twelve nations have formally recognized Taiwan's independence from the mainland.

Conversely, at least formally if not realistically, Taiwan also claims the mainland of China as part of its territory. For historical context, this all goes back to the Chinese communist revolution, which culminated in 1949. The People's Republic of China (the communists) took control of most of China at that point.

The armed forces of the Republic of China (the nationalists) retreated to Taiwan where they regrouped. There has been tension between the two Chinese governments ever since with neither side able or willing to advance on the other beyond the point of harassment. Equity index futures markets are acting well overnight ahead of the coming meet up between Trump and Xi and reversing a large portion of Tuesday's losses.

Hot to the Touch

The Bureau of Labor Statistics released their April consumer price index data on Tuesday morning. Not only was consumer-level inflation a bit hotter than I expected for April, it was hotter than was the consensus view coming in, which was pretty warm. At the headline level, April consumer prices were up 0.6% from March and 3.8% from April 2025. The culprit behind the move was obviously energy prices. Gasoline prices for April were up 5.4% from March and up 28.4% from the year-ago month of April. Fuel oil to include heating oil grew 5.8% on the monthly count and grew a stunning 54.3% annually.

Is inflation really that bad? Well, it is if one has to drive their vehicle or heat their home. The surge in inflation was not, however, broadly felt across the economy. One would have thought that with fuel prices rising that input costs would have forced businesses from across the entire economy to raise prices. That was not really the case in April, though it could be in May. Core CPI (not including food and energy) saw a month-over-month increase of 0.4% and year-over-year rise of 2.8% for April. A little warm? A little.

As long as this current bout with inflation remains a short-term reaction to a supply shock, we'll be alright. Once consumer-level inflationary expectations really start moving, we'll then have to consider that maybe this rise in prices has become structural. I do not think that we are there yet. The bright spots, from the consumer's perspective in April, were new (prices actually went down) and used vehicles, medical care commodities, medical care services, and believe it or not.... piped natural gas.

For those looking to sound the alarm, the Cleveland Fed's model for May currently shows core CPI holding at annual growth of 2.82% while headline CPI soars to growth of 4.16%. Our friends at Hedgeye, which is who I outsource some of my macroeconomic research to, currently see May CPI running close to an annual pace of 4.25%. That would rattle some cages. The rise in CPI for April actually moved Fed Funds futures markets towards an eventual rising interest rate bias that becomes visible in 2027.

Help Is on the Way?

Maybe. Guess we'll find out. You all know that I don't think the current Fed Chair did a great job and he's still going to be around. The new sheriff in town will, I suppose, get his chance. The U.S. Senate confirmed Kevin Warsh back to the Federal Reserve Board of Governors where he previously served from 2006 to 2011.

The upper chamber of the legislative branch of the U.S. government confirmed the president's nominee to the board in a 51-to-45 vote that largely went along party lines. Pennsylvania Sen. Mark Fetterman, a Democrat, was the lone political crossover. This places Warsh one vote away from assuming the chair at our nation's central bank. That vote could come as soon as today (Wednesday).

Powell's term as chair runs through Friday. He will retain his position on the board of governors after leaving the top job, possibly into 2028. Given Powell's intention to remain on the board, Warsh will have to take the seat previously occupied by Stephen Miran. Miran is a Trump ally who filled in when Adriana Kugler resigned from her post amid an ethics probe with five months left in her term.

Bottom line? The president does not gain influence with one perceived ally replacing another, which may be the real reason behind Powell's decision to stick around. A Supreme Court case is still pending over whether the president can fire sitting Gov. Lisa Cook, a Biden appointee over allegations of mortgage fraud, but I do not see that case as likely to go the president's way. This is likely how the Board will look for now.

I Won't Back Down

No, I'll stand my ground
Won't be turned around
And I'll keep this world from draggin' me down
Gonna stand my ground
And I won't back down

- Petty, Lynn (Tom Petty and the Heartbreakers (1989)

Marketplace

Treasury securities were hit by sellers on Tuesday. Crude oil rallied on the apparent breakdown of peace talks between the U.S. and Iran. Lastly, equities sold off on the CPI news and on those rising oil prices. That said, futures markets are showing some optimism ahead of the president's China visit.

The S&P 500 backed up just slightly, taking a 0.16% loss for the day, while the Nasdaq Composite surrendered 0.71%. The small- to mid-cap equity indexes all gave back between 0.66% and 1.14% on the session, while the Dow Transports were slapped around for 0.94%. The real losses were in the semiconductor space though, as that's where the real profits of late have been. The Philly Semiconductors gave back 3.01% on Tuesday, led lower by Qualcomm (QCOM) , and Intel (INTC) . Those two names lost 11.5% and 6.8% respectively for the day.

Breadth

Surprisingly, six of the 11 S&P sector SPDR exchange-traded funds closed out the Tuesday session in the green. Health Care (XLV) and the Staples (XLP) led the winners as the defensives finally had their day. Technology rode out the session in the caboose as in addition to the beatdown suffered by the semis, the Dow Jones US Software Index lost 1.34%.

Losers beat winners by a rough five to three at the NYSE and by a two-to-one margin at the Nasdaq. Advancing volume took a 40.8% share of composite NYSE-listed trade and just a 37.1% share of composite Nasdaq-listed trade. A day one bearish reversal of trend? Not even close. Aggregate trade dried up significantly on Tuesday, indicating that professional managers were not participating to a great degree in the day's selloff. Trade across NYSE-listed securities was down 3.4% on a day-over-day basis, while trade dropped a jaw-dropping 19.7% across Nasdaq-listed names. Activity dropped across the membership of the S&P 500 as well.

Note To Readers

Your all-time favorite financial talking head will be taking two days off. The next Market Recon column will run, God willing, on Monday morning. May you be blessed in all that you do today and may you experience victory in all of your campaigns.

Economics

(All Times Eastern)

07:00 - MBA 30 Year Mortgage Rate (Weekly): Last 6.45%.

07:00 - MBA Mortgage Applications (Weekly): Last -4.4% w/w.

08:30 - PPI (Apr): Expecting 0.4% m/m, Last 0.5% m/m.

08:30 - Core PPI (Apr): Expecting 0.3% m/m, Last 0.1% m/m.

08:30 - PPI (Apr): Expecting 4.1% y/y, Last 4.0% y/y.

08:30 - Core PPI (Apr): Expecting 3.9% y/y, Last 3.8% y/y.

10:30 - Oil Inventories (Weekly): Last -2.314M.

10:30 - Gasoline Stocks (Weekly): Last -2.504M.

1:00 p.m. - Thirty-Year Bond Auction: $25B.

The Fed

(All Times Eastern)

11:30 - Speaker: Boston Fed Pres. Susan Collins.

1:15 p.m. - Speaker: Minneapolis Fed Pres. Neel Kashkari.

7:00 - Speaker: Dallas Fed Pres. Lorie Logan.

Today's Earnings Highlights

(Consensus EPS Expectations)

After the Close: (CSCO) (1.04)

At the time of publication, Guilfoyle had no position in any security mentioned.