Cooling Inflation Boosts Markets as AI Chip Sector Delivers Mixed Fortunes

Inflation Eases, But New Threats Emerge

Recent data shows a significant cooling in consumer prices, giving markets a dose of optimism. The Consumer Price Index (CPI) for June fell by a sharp 0.4% month-on-month, pulling the annual rate down to 3.5% from 4.2% in May. This was the steepest monthly drop in several years, largely driven by a 5.7% decline in the energy index as a brief ceasefire in the Middle East allowed petrol prices to fall.

Core Inflation Offers Hope

Crucially for policymakers, 'core' inflation, which strips out volatile food and energy prices, remained flat for the month. The annual core rate fell to 2.6%, reversing three consecutive months of increases. This offers the first solid proof that underlying price pressures may be genuinely easing.

However, not all prices are falling. Grocery inflation remains stubbornly high, and the AI boom has fuelled a record 17.4% year-on-year jump in computer software costs, a category central bankers are now watching closely.

Fed Chair Signals Tough Stance

Despite the positive data, new Federal Reserve Chair Kevin Warsh has adopted a firm tone. In a recent speech, he emphasised that the central bank "won't back down on inflation," highlighting the burden that high prices place on households, which he described as an "unfair burden" and a "tax" on Americans. With a rate decision looming, his comments suggest policymakers may be inclined to raise rates at least once more this year, clashing with the market's more optimistic view.

Market Reaction and Future Risks

In response to the inflation data, traders dramatically lowered their bets on a July interest rate hike, with the odds of a hold jumping to over 80%. Despite this, the possibility of a rate increase later in the year remains, especially with renewed US-Iran strikes pushing Brent crude oil prices up again. This threatens to reverse the recent energy-driven relief in the upcoming July inflation report.

A Divided AI Landscape: Hardware Booms, Software Busts

The artificial intelligence boom is not benefitting all technology companies equally. Recent results have exposed a stark divide between the essential hardware suppliers and traditional software firms, with investors reacting violently to the shifting landscape.

ASML Raises Forecast on Unstoppable Demand

ASML, the Dutch firm with a near-monopoly on the advanced machines needed to produce top-tier microchips, has raised its full-year sales forecast for the second time this year. It now anticipates revenue between €43 billion and €45 billion, citing “extremely strong” orders as clients rush to build AI manufacturing capacity. As a fundamental part of the chip supply chain, ASML's order book is a reliable signal of future investment across the entire semiconductor industry.

IBM Suffers Worst Day Since 1987

In a stunning contrast, IBM's shares plummeted over 25% in a single day, marking the company's worst performance since the 1987 market crash. The collapse was triggered by a preliminary results announcement that missed market expectations, with revenue expected at $17.2 billion against forecasts of $17.9 billion.

In a letter to shareholders, the chief executive explained that clients had abruptly diverted their budgets in the final weeks of the quarter. They shifted spending away from software projects and towards securing essential hardware like servers and memory chips, fearing future price hikes and supply shortages. This shift suggests the enormous investment in AI is cannibalising other areas of corporate tech spending. The market reacted instantly, with shares in other software firms like Adobe and Oracle also falling, while hardware makers like Dell and SK Hynix surged.

However, not all software is suffering. The CEO's comments that cyber fears remain a top priority for customers sparked a rally in cybersecurity stocks. Shares in firms like CrowdStrike and Okta saw double-digit percentage gains, suggesting investors see them as a non-negotiable expense even as other software budgets are cut.

The Data Centre Backlash

While demand for AI hardware soars, a new headwind is emerging: local opposition to the vast data centres required to power them. In a landmark move, New York has become the first US state to impose a temporary ban on the construction of new large-scale data centres for the next year. The state justified the pause by highlighting that electricity prices have jumped nearly 68% since 2019 and citing concerns over their enormous energy consumption. This growing 'not in my backyard' sentiment could create significant long-term hurdles for the physical build-out of AI infrastructure.

Banking Giants Post Record Profits

Wall Street's largest banks are enjoying a period of exceptional profitability, smashing analyst expectations and demonstrating the resilience of the financial system. The boom is being driven by volatile markets, which boosts trading revenue, and a strong revival in corporate dealmaking.

Six of America's biggest banks have now reported a collective profit well in excess of $43 billion, with several setting new records:

• JPMorgan Chase: Delivered the largest quarterly profit in US banking history, with net income hitting $21.2 billion, up 41% year-on-year. CEO Jamie Dimon noted that AI had enabled the bank to cut around 40% of roles in some departments, contributing to efficiency.
• Goldman Sachs: Posted record quarterly net revenue of $20.3 billion. Its stock trading desk alone generated a record $7.42 billion, and the bank announced a new $10 billion bond sale.
• Morgan Stanley: Also reported record quarterly revenue and profit, with its equities trading division seeing a revenue jump of nearly 70%. The bank easily beat Wall Street expectations, posting earnings of $3.46 per share on $21.35 billion in revenue.
• Citigroup: Comfortably beat all estimates, with revenue rising to its highest level in a decade at $24.8 billion.
• Bank of America: Saw its consumer division bring in $3.3 billion, driven by strong spending.
• Wells Fargo: Also posted record-breaking results, confirming a powerful trend across the sector.

The key driver has been a surge in equities trading, fuelled by AI-driven market volatility and major stock market listings. Underscoring this point, Goldman's CEO told analysts, “we are in the middle of an AI capex super cycle.” The main question for investors is how long this can last, as trading revenues are notoriously cyclical.

Geopolitical Tensions Drive Oil Prices Higher

Oil prices have climbed to a one-month high, with Brent crude trading around $85 per barrel. The rise follows renewed US military strikes against Iran and the reinstatement of a naval blockade of Iranian ports near the Strait of Hormuz, a critical channel for global oil shipments.

While the White House has reportedly dropped a controversial plan to charge ships a 20% fee to pass through the strait after backlash from shipping firms, the physical blockade remains firmly in place. This presents a significant problem for the broader inflation outlook, as the risk of supply disruptions remains high.

Digital Assets Face Headwinds and Major Shifts

The digital asset market is undergoing a period of intense change, marked by growing scepticism from traditional analysts, major shifts in underlying technology, and new product launches from established financial players.

Wall Street Grows Sceptical on Crypto Exchanges

Major investment banks are signalling caution on publicly traded crypto firms. Analysts at Mizuho downgraded stablecoin issuer Circle to 'Underperform', cutting their price target by 41% to $50. Similarly, JPMorgan lowered its earnings estimates for both Circle and Coinbase. The concern centres on new competition from the 'Open USD' stablecoin consortium, which threatens the profitability of incumbents.

Retail Fades as New Uses Emerge

The market dynamic appears to be shifting from retail speculation to niche applications. Social media mentions of Bitcoin and Ethereum have fallen to their lowest levels since 2020, suggesting that many retail investors have stepped away. In their place, crypto companies are chasing specific opportunities, such as a new partnership between Blockchain.com and Polymarket to capture a piece of the estimated $10 billion World Cup betting market.

Corporate Bitcoin Strategy Under Scrutiny

Strategy, a company known for its large Bitcoin treasury, has adjusted its financial approach. The firm recently raised over $466 million by selling company shares, using the cash to bolster its reserves without selling any of its significant Bitcoin holdings. This deliberate shift suggests a strategy to protect its core Bitcoin position, though its shares still fell on the news, reflecting broader weakness.

Robinhood Enters the Fray with Tokenised Assets

In a significant move bridging traditional finance and crypto, US brokerage Robinhood is launching its own network called Robinhood Chain. The network is specifically designed for 'tokenised real-world assets' (RWAs) — essentially digital representations of physical assets like stocks or property. By pre-loading 28 million accounts, Robinhood aims to make it easier for international investors to access US markets.

Infrastructure Shake-Up: A 'Flight to Safety'

A recent exploit on a crypto service called LayerZero has triggered a mass migration of funds. Over $7.2 billion in assets have moved to a rival platform, Chainlink's CCIP. This highlights a 'flight to safety' within the crypto world, where major players are shifting huge sums to infrastructure they perceive as more secure and reliable for moving tokens between different networks.

Other Market Movers

PayPal Receives Takeover Offer

Payments company PayPal has reportedly received a takeover offer from Stripe and private equity firm Advent International. The bid is said to value PayPal at over $53 billion, or $60.50 per share, which represents a 28% premium over its recent trading price. The news highlights a resurgence in large-scale merger and acquisition activity.

China's Economy Shows Signs of Strain

China's economic growth has slowed to its lowest rate in more than three years. Gross Domestic Product (GDP) grew by 4.3% in the last quarter, falling short of forecasts. The country's National Statistics Bureau noted a significant imbalance between excessive supply and weak consumer demand, increasing pressure on policymakers to provide more economic support.

Gold's Tug-of-War

Gold prices have been volatile, caught between competing signals. The metal initially jumped when the soft inflation data was released, as lower interest rates make non-yielding assets like gold more attractive. However, it later retreated as rising oil prices revived inflation fears, which could force central banks to keep rates higher for longer.

US Treasuries See Record Foreign Demand

Despite domestic challenges, the US dollar remains a safe haven for global investors. Foreign holdings of US government debt recently hit a near-record $9.37 trillion. This steady demand from abroad helps the US government fund its spending and can contribute to keeping borrowing costs, such as mortgage rates, lower than they otherwise would be.

The Great Wealth Transfer Creates New Risks

Economists are watching a massive generational wealth transfer in the US, with an estimated $93 trillion set to be passed down from Baby Boomers. However, analyses show the inheritance is not being spread evenly, with nearly 75% expected to go to households already in the top 10% of wealth. This concentration could deepen the wealth gap and have long-term impacts on consumer spending and investment patterns.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).