Inflation Data Decides Fed's Next Move as AI Firms Report Blockbuster Orders

Inflation and A New Global Rate Threat

All eyes are on the release of the US consumer price index (CPI) for July, a report that will heavily influence the Federal Reserve's next interest rate decision. The S&P 500 fell for a second straight day ahead of the release, showing clear investor nervousness. Market predictions for a September rate hike are split down the middle, reflecting deep uncertainty.

Economists anticipate the headline annual inflation rate will ease to 3.4%, with a monthly increase of just 0.1%. However, policymakers are more focused on the 'core' monthly figure, which strips out volatile food and energy. A reading of 0.2% or lower would support holding rates steady, while 0.3% or higher would likely signal another increase, with analysts at JPMorgan warning of notable market swings depending on the outcome.

The Japanese 'Carry Trade' Complication

However, a new risk is emerging that could pressure stocks even if US inflation behaves. The Bank of Japan looks increasingly likely to raise its own interest rates in September to defend its weakening currency. This threatens to unwind the popular 'yen carry trade', a strategy where investors borrow money cheaply in yen, convert it to dollars, and buy higher-yielding US assets like government bonds or even tech stocks.

This trade relies on the large gap between US and Japanese interest rates. If the Bank of Japan raises rates, that gap narrows, making the strategy less profitable and prompting investors to sell their US assets to repay their yen loans. This could trigger a significant stock market sell-off, a scenario reminiscent of August 2024 when a similar situation caused the S&P 500 to fall over 6% in just three days.

Domestic Labour Market Pressures

Adding another layer of complexity is the US labour market. The number of people leaving the workforce has hit historic levels, driven by a wave of retirements. The labour-force participation rate saw its steepest January-to-July drop on record outside of the pandemic. A smaller pool of available workers can lead to higher wage demands, which in turn can keep inflation stubbornly high.

AI Boom: Record Orders Meet Soaring Debt

The artificial intelligence sector continues to show explosive growth, but the enormous cost of this expansion is becoming clearer. Recent corporate updates reveal a landscape of unprecedented demand financed by staggering levels of debt.

Infrastructure Specialists Surge

AI infrastructure firms CoreWeave and Super Micro Computer delivered strong results, confirming voracious demand as both beat Wall Street expectations. CoreWeave’s revenue surged 112% to $2.58 billion, and its future revenue backlog swelled to an incredible $104 billion. Following the results, its stock surged 14% in extended trading, buoyed by new business deals with major AI labs Anthropic and Meta.

However, this growth is heavily leveraged. CoreWeave's net debt has climbed to around £21.8 billion, and its quarterly interest payments of $640 million were larger than its net loss. This highlights a critical theme: the AI arms race is being funded with borrowed money. The divide is growing between heavily backed players like CoreWeave and smaller firms like Applied Digital, which faces a higher risk of diluting its shares to fund its expansion.

Big Tech's Spending Spree

The debt-fuelled expansion extends to the giants of the industry. Alphabet recently raised $25 billion in a bond sale to fund a spending programme that could reach $205 billion by 2026, primarily for data centres. This spending has already pushed the company to its first-ever quarter of negative free cash flow.

Meanwhile, Nvidia is working with major asset managers to make $500 billion in financing available for companies wanting to buy its expensive AI hardware. This move underscores the idea that AI infrastructure is becoming a distinct asset class, but it hinges on Nvidia's chips retaining their value in a fast-moving market.

New Ways to Trade AI

AI Power Becomes a Tradable Commodity

The financialisation of the AI sector is taking another leap forward. The CME Group, a major derivatives exchange, is set to launch the first futures contracts tied to the cost of running AI chips. In partnership with Silicon Data, these contracts would allow investors to trade AI computing capacity in a similar way to oil or gold, effectively turning processing power into a tradable commodity.

The Influence of Leveraged ETFs

A niche but potent corner of the market involves AI-focused leveraged exchange-traded funds (ETFs). These funds, which use borrowing to magnify returns and risks, account for just 1% of global ETF assets but generate a disproportionately large 16% of daily ETF trading volume. Because their strategies are often concentrated on a few major AI names, their trading activity can create significant price swings across the wider market.

Crypto Miners Enter the AI Fray

The immense energy requirements of AI are creating new business models. In a notable example of this convergence, Texas-based Bitcoin miner Riot Platforms has struck a deal with AI lab Anthropic to provide power and data centre capacity. This pivot highlights a growing trend of crypto firms leveraging their infrastructure to service the AI boom, especially during downturns in the digital asset market.

Broadening AI Demand and 'Chipflation'

The boom is also lifting other parts of the tech ecosystem. Networking firm Cisco has already secured $9 billion in AI-related orders this year. Lumentum, a specialist in optical technology that connects data centres, also reported earnings that soared past expectations, with revenue climbing 109% year-on-year. The insatiable demand for chips is creating 'chipflation', where PC and smartphone makers are forced to compete for a smaller pool of memory chips, which is expected to drive a 15% increase in consumer electronics prices.

A Tale of Two Infrastructures

While AI data centres grab headlines, savvy investors are also pouring money into more traditional infrastructure like roads, water systems, and mobile phone towers. These 'boring' assets offer steady demand and predictable cash flows backed by long-term contracts.

• National Grid is benefiting from the overhaul of power grids on both sides of the Atlantic to support renewable energy.
• American Tower and Crown Castle, which own mobile phone towers, are seen as undervalued plays on the continued rollout of 5G technology.

Sector Spotlight: Rotation and New Opportunities

As the market digests the high valuations in the technology sector, money is beginning to flow into other areas, creating new dynamics for investors to watch.

Healthcare Gains as AI Trade Stumbles

During recent periods of volatility, a clear rotation has occurred out of high-flying semiconductor stocks and into the more defensive healthcare sector. At one point in late June, the Health Care ETF ($XLV) outperformed the Semiconductor ETF ($SMH) by over 30 percentage points. Healthcare stocks trade at a much lower valuation (around 18 times forward earnings) compared to semiconductor stocks (22-30 times), making them appear relatively cheap.

Beyond the Hype: Shifts in Consumer Spending

There are also notable shifts happening in consumer-facing businesses:

• Fast Food: Restaurant chains are finding that simple price cuts are no longer enough to attract customers. Winners like Taco Bell are successfully blending value with new menu items, while others like McDonald's have struggled where promotions have failed to stand out.
• Airbnb's Hotel Push: Airbnb is aggressively expanding its hotel listings, a segment that is growing three times faster than its core home-rental business. While still a small part of its overall bookings, hotels are proving to be an effective way for the company to attract new customers.
• Rising Consumer Debt: The strain on household budgets is becoming more apparent. A report from the New York Fed showed that collective credit card debt in the US climbed to a near-record $1.26 trillion in the second quarter. More worryingly, the number of consumers falling behind on payments is growing, with 12.8% of balances now more than 90 days late. This rising debt burden, amplified by higher interest rates, could eventually put a brake on consumer spending.

Housing Market Awaits Relief

The strain is also evident in the property market, where households are falling behind on mortgage payments at the highest rate in a decade. Data for July showed existing-home sales fell to a three-month low, as buyers were squeezed by a record median home price of $434,100 and mortgage rates hovering near 7%. The CEO of Invitation Homes, a major US rental landlord, noted that while a recent housing bill should lower property costs over the medium to long term, any significant price drop is unlikely in the short term.

Geopolitical Tensions Push Oil Prices Higher

Crude oil prices have continued to climb, with Brent crude hovering near $89 a barrel. The rally is being driven by escalating conflicts in the Middle East that threaten to disrupt global supply. West Texas Intermediate (WTI), the US benchmark, has risen over 10% in the past week alone.

A Houthi attack on a cargo ship in the Red Sea resulted in the first fatalities in over a year of such incidents, while the vital Strait of Hormuz remains effectively shut. However, there are tentative signs of a diplomatic solution. Pakistan's government has indicated that the US and Iran are nearing a potential agreement to de-escalate the conflict. While Iran maintains its demands must be met, any firm progress on a deal could quickly reduce the risk premium priced into oil.

The International Energy Agency (IEA) has again lowered its long-term oil demand forecast, but it noted that global supply is falling even faster. This situation is worsened by dwindling US reserves; the Strategic Petroleum Reserve has fallen to its lowest level since 1983, reducing America's ability to respond to further supply shocks.

European EV Adoption Accelerates

The sustained high price of fuel is directly impacting consumer behaviour in Europe. In Germany, a record 12% of drivers traded in a petrol or diesel car for an electric vehicle (EV) in the second quarter, a trend spurred by fuel costs exceeding €2 per litre following the Middle East conflict.

Currencies and Crypto Await Direction

Significant developments in the currency and digital asset markets show a sector grappling with technical complexity and the challenge of turning hype into sustainable revenue, even as adoption grows in certain areas.

Japanese Yen Under Pressure

Japan's yen continues to weaken, once again approaching the critical 160 level against the US dollar. This slide has erased the gains from a previous government intervention. As long as the huge gap in interest rates between Japan and the US persists, the yen is likely to remain under pressure, fuelling the 'carry trade' dynamics that pose a risk to stock markets.

Bitcoin's Slow Grind

The outlook for Bitcoin suggests a period of patience is required. ETF products tracking the asset have seen net outflows of $5 billion over the past year, a stark contrast to other thematic funds. On-chain data, which analyses blockchain activity, suggests Bitcoin is in a deep value zone typically associated with long-term accumulation. However, the recovery appears to be driven by a lack of sellers rather than a surge of new buyers. The main catalyst for a significant price rise would likely be large asset managers making meaningful allocations to their portfolios.

The 'Real World' Push and Its Problems

Major crypto firms are pushing further into mainstream finance, but the results are mixed:

• Exchanges Expand: Coinbase is rolling out derivatives like perpetuals and futures to professional UK investors and has launched a new hub in Abu Dhabi to turn traditional securities into on-chain tokens.
• Payment Cards Grow: The volume on crypto-backed payment cards hit $759 million in July, a 2.5x increase year-on-year. US dollar stablecoins (USDC and USDT) now account for over 80% of this spending, showing a clear preference over euro-based alternatives.
• Growth Plateaus: A closer look at Mastercard's acquisition of payments firm BVNK shows that while transaction volumes grew impressively in 2025, they have flattened and even slightly declined in recent quarters.
• Robinhood's Struggle: Despite launching its own blockchain, Robinhood’s crypto revenue fell 38% year-on-year in the second quarter. Revenue from its new chain is currently insignificant to the company's overall financial performance.

Technical and Regulatory Challenges

Ethereum's Crossroads

Ethereum, the second-largest cryptocurrency, is navigating a series of highly complex technical upgrades. An updated 2026 roadmap prioritises future-proofing the network against quantum computing and enhancing user privacy. However, a separate proposal to reduce the rate at which new Ether is created has sparked debate. Critics warn it could destabilise the multi-billion dollar lending market that relies on staking yields, potentially putting a large portion of Ethereum's market dominance at risk.

Regulatory Headwinds in the US

In the United States, the path to clearer regulation remains slow. A recent delay to the proposed Clarity Act means the Securities and Exchange Commission (SEC) continues to operate without an established crypto-specific framework, adding to the sector's uncertainty.

Tether and Stablecoins

The crypto platform Tether, which issues the world's largest stablecoin, continues its strategy of diversifying its reserves into traditional assets. It has become one of the biggest buyers of physical gold, joining central banks. At the same time, data shows the circulating supply of its USDT stablecoin has shrunk by approximately $4 billion over the past 60 days, signalling a potential reduction in market liquidity.

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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).