Stocks bounced back today after yesterday’s trade-triggered rout, on hopes that cooler heads will eventually prevail and a full-blown trade war can be averted. In my view, that hope is delusional. I’ll elaborate in a minute.

First, the good news.

The major equity benchmarks ended in the green today, with technology and industrial stocks leading the charge. The “FAANG” stocks surged to new highs. Tailwinds included strong economic data and upbeat expectations for corporate earnings.

The U.S. job market remains robust, with the economy near “full employment.” Many companies are reporting difficulties in finding enough skilled workers, a labor shortage that should continue to fuel wage growth.

The U.S. Labor Department reported Thursday that the number of Americans filing for unemployment benefits fell more than expected last week, hitting a two-month low.

For the week ended July 7, initial claims for state unemployment benefits fell 18,000 to a seasonally adjusted 214,000, the lowest level since early May. The consensus predicted claims would fall to 225,000 in the latest week.

The unemployment rate in June climbed to 4% from an 18-year low of 3.8% in May, but this uptick actually is beneficial because it means more people entered the labor force.

The Labor Department also reported Thursday that its Consumer Price Index (CPI) edged up 0.1% in June, compared to a rise of 0.2% in May.

Excluding the volatile food and energy components, the so-called “core” CPI rose 0.2% last month, matching May’s gain. That lifted the annual increase in the core CPI to 2.3%, the largest rise since January 2017, from 2.2% in May. The consensus was that both the CPI and core CPI would rise 0.2% in June.

The muted rise in CPI levels for June is a favorable development on the inflation front. However, inflationary pressures continue to percolate under the surface.

In a less positive but more revealing report yesterday, the Labor Department revealed that the wholesale cost of goods and services rose in June at the highest yearly rate in almost seven years.

The Producer Price Index (PPI) rose 0.3% June. As you can see from the chart, the upward inflationary trend is quite clear:

The 12-month rate of wholesale inflation climbed to 3.4% from 3.1%, the highest level since 2011.

Rising energy and raw material prices, a tightening labor market, tit-for-tat tariffs, and the stimulus of tax cuts and federal budget deficits are stoking inflation.

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, hit the central bank’s 2% target in May for the first time in six years. The Fed expects the PCE to overshoot the target this year.

Delusions of cease fire…

Costly tariffs are a major part of the inflation equation. Think a trade war can be averted? Sorry to dash your hopes, but it’s already underway. We’re seeing tangible harm in terms of canceled orders, disrupted supply chains, delayed deals, and general mistrust.

Keep this in mind: If tariffs push certain prices higher, it’s unlikely those prices will quickly come down when trade hostilities end.

China on Thursday urged U.S. companies to lobby the Trump administration to abandon its protectionism, saying that tariffs are against the self-interest of America. China hinted that instead of tariffs, it might seek customized reprisals against U.S. firms doing business in the country.

Apple (NSDQ: AAPL), Nvidia (NSDQ: NVDA) and Broadcom (NSDQ: AVGO) get more than 20% of their sales from China. The country doesn’t need to impose tariffs to punish these companies; Beijing has other tools available. It could initiate boycotts and regulations, or simply cut off its supply of rare earth minerals needed to manufacture electronic devices.

Also on Thursday, South Korea warned that its technology exports would get hammered in a trade war. South Korea is Asia’s fourth-largest economy; a slow-down in this strategically important country would ripple throughout the region.

Treasury Secretary Steven Mnuchin today said the economy hasn’t been harmed by the administration’s trade disputes. Mnuchin should have a conversation with folks in the farm belt.

In a shot at America’s heartland, Beijing today slashed its planned purchases of U.S.-produced soybeans. Farmers are a key part of Trump’s electoral base in states such as Iowa, Kansas, and Texas. China has switched to alternative sources for soybeans, wreaking financial pain on Trump-supporting “red states.”

It’s a shame that U.S. policymakers never spent as much time studying China and its history as the Chinese spent studying the U.S.

But for today, trade took a back seat to positive economic data. New data to watch, scheduled for release tomorrow, are the import price and consumer sentiment indices. In this fraught investment climate, new economic reports have the power to disproportionately move markets. Get used to the roller coaster.

And remember: hope is not a strategy. Investors seem to have their fingers crossed… and their eyes closed.

Thursday Market Wrap

• DJIA: +0.91% or +224.74 points to close at 24,925.19
  
• S&P 509: +0.87% or +24.27 points to close at 2,798.29
  
• Nasdaq: +1.39% or +107.30 points to close at 7,823.92
  

Thursday’s Big Gainers

• Papa John’s International (NSDQ: PZZA) +11.05%

Pizza chain’s controversial chairman quits after making racial slur.

• Engility Holdings (NYSE: EGL) +10.55%

Engineering firm targeted as potential buyout candidate.

• Spirit Airlines (NYSE: SAVE) +10.23%

Analysts turn bullish on air carrier.

Thursday’s Big Decliners

• Broadcom (NSDQ: AVGO) -13.74%

Analysts negative on chip maker’s offer to buy software firm.

• AcelRx Pharmaceuticals (NSDQ: ACRX) -13.24%

Biotech announces offering of common stock.

• Zion Oil & Gas (NSDQ: ZN) -11.00%

Energy producer subject of SEC inquiry.

Letters to the Editor

“Despite increasing economic risks, why do consumers remain so confident?” — Rob H.

Unemployment is low, wages are rising, and the housing market is robust. The bull stock market is wobbly but still in place. This momentum is overpowering whatever qualms consumers may harbor about trade conflict and the dysfunctional political class.

Questions about the state of the economy? I welcome your letters: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.