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The story of the past week is familiar: markets are looking in the wrong direction to gauge the inflation risk. While CPI may appear calm, the real signal is coming from upstream, i.e. from the earlier stages of the production process. The US Producer Price Index (PPI) jumped 0.9% month-on-month in July, more than four times expectations and the sharpest monthly rise in three years. Core PPI (excluding food and energy) climbed to 3.7% year-on-year, its highest level since 2021. These figures are not abstract; they show that costs are rising across the supply chain, machinery, retail trade, and transport services are all flashing red. The risk is clear: consumer inflation could reaccelerate just when markets appear complacent that the job is done.
The contradiction in US data is adding to the unease. Retail sales remain buoyant, with a 0.5% monthly increase, but industrial production has softened. The strength in retail sales indicates it could be one final burst of consumer spending before households pull back, or it could reflect still-solid wage growth keeping demand afloat. Either way, manufacturers will feel encouraged to pass higher costs on to consumers, reinforcing the pipeline pressure from PPI. The upcoming earnings from Walmart, Home Depot, Target, and Lowe’s will provide a more precise indication of how far costs are being passed through the system.
Chart 1: Steepening US Yield Curve Signals Bond Market’s Concern About Persistent Inflation
US 10-year yield minus the US two-year yield
Source: Bloomberg
US equities- Price-to-book at an all-time high
The US equity market, for now, refuses to blink, but the resilience looks increasingly precarious. Money flows have slowed, and leverage has reached historic highs. Margin debt has surpassed $1 trillion for the first time, as investors pour into leveraged ETFs and call options. It is a classic late-cycle cocktail: speculation driving gains but leaving markets highly susceptible to shocks. Valuations, too, are stretched. The S&P 500 price-to-book ratio of 5.3x is near its highest on record, and the price-to-earnings multiples are at levels that only look sensible if earnings continue to expand without interruption. Clearly, the risk-reward trade-off for US equities has rarely looked so asymmetric.
Chart 2: US Equities’ Price-to-Book Ratio at All-Time High (MSCI Index)
Source: Bloomberg
Jackson Hole takes on added importance
Attention now turns to Jackson Hole. Jerome Powell will use this platform to reaffirm the Federal Reserve’s independence and its commitment to fighting inflation, but we do not rule out a change in tone this time.The Fed is reviewing its monetary policy framework, and we expect Powell to begin edging away from the post-2020 “flexible average inflation targeting” regime. That framework, which permitted inflation overshoots to compensate for past shortfalls, has lost credibility after the 2021–22 surge. A more symmetrical and pragmatic approach is likely to replace it, backed by clearer and more adaptive communication. For markets, such a shift would matter as much for what it signals about the Fed’s tolerance for inflation as for the immediate policy path.
Against this backdrop, it is tempting to look further afield for opportunities. The US equity market is perched precariously, relying on the Fed to deliver rate cuts that may not come quickly enough. In Europe, the policy rate is at just 2.0%, with inflation trending lower and room for further easing. Valuations are cheaper, and cyclicals could benefit if policy support persists. In Japan, a sharp rise in minimum wages should support consumption even if the Bank of Japan moves cautiously toward policy normalisation. Both markets offer more attractive entry points than a stretched and leveraged Wall Street.
China, meanwhile, continues to show a moderation of growth. July’s economic data were lacklustre, with consumption and industrial output only modestly ahead and profits still under pressure. Yet, Beijing is showing both pragmatism and resolve. Fiscal policy has been front-loaded, the central bank has eased reserve requirements, and targeted lending has been expanded. Perhaps most importantly, China’s export engine is being rewired. Exports to ASEAN are up 13.5% so far this year, to Africa 24.5%, with strong gains also in India and Latin America. A decade ago, China’s Belt and Road partners accounted for less than 40% of its trade; today it is more than half. Beijing has not solved its structural challenges, no major economy has but it is methodically diversifying risks and bolstering resilience.
Chart 3: The Value Lies Outside the US Equity Market
P/E Valuations of leading MSCI equity Indices
Source: Bloomberg
In short, the PPI shock is a reminder that inflation risks are not vanquished. US equities, heavily leveraged and richly priced, are vulnerable. The smarter play is rotation: trimming exposure to an overstretched US market, adding selectively to Europe and Japan exposures, and keeping a close watch on China’s policy recalibration. The pipeline is warning us. The question is whether investors are listening.
Dollar remains at risk from many directions
Dollar will be the key indicator of how investors perceive the quality of the US economic outlook. DXY remains biased to the downside. After a late July rally, the index has slipped back into its downward channel. As an example, Japanese equities in dollar terms are up 8.2% month-to-date.
The appointment of Stephen Miran to the Fed Board should set alarm bells ringing for dollar bulls. Miran is not just another policy wonk. He is the intellectual architect of the so-called “Mar-a-Lago Accord,” a half-baked blueprint for engineering dollar weakness through a cocktail of tariffs, coercion, and debt restructuring. It is the antithesis of the Plaza Accord of 1985, which was a carefully orchestrated, multilateral rebalancing of currencies. Miran’s approach, on the contrary, reeks of unilateralism and political opportunism. Markets should be under no illusion: a Fed with Miran at the table will be more dovish, more pliant to White House pressure, and implicitly more comfortable with a weaker dollar. The credibility of US monetary policy—and by extension the dollar’s reserve status—could be the collateral damage.
Chart 4: DXY-USD Spot Index Slipping Lower
Source: Bloomberg
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
18th August 2025
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