Cooler prices ease hike fears and push stocks to new highs

Good morning. Last night brought a second straight day of cooling-inflation news. July producer prices were flat, below the 0.2% rise economists expected, as energy and food prices fell, making it a second calm month in a row. After the consumer price report a day earlier, it is another relief signal. Odds of a September rate hike dropped from 55% to 32%, and traders now treat a September hold as the base case.

The S&P 500 and the Dow both set fresh records. The solid support under the rally is corporate profitability: the S&P 500's net profit margin is tracking 16.9%, the highest since the data began. Cleveland Fed President Hammack still says rates should go up now, though, and weekly jobless claims rose to 209,000, more than expected, so the shadow over jobs has not lifted.

It is a little surprising that oil has not spiked more. The U.S. has signaled it may keep its naval blockade of Iran in place indefinitely, and more than a quarter of the world's oil that normally passes through Hormuz is blocked. The first cracks show up in refined products. In Europe, diesel overtook jet fuel for the first time in about a year, and Russia's Orsk refinery, hit by Ukrainian drones, is fully shut and could take up to six months to restart.

There are plenty of worries under the rally. Bond yields are not falling despite cooler prices, a credit-market warning says AI financing looks like 2007, and valuation measures sit near historic highs.