Inflation Reaches 4% Milestone, Rocking Tech Stocks and Testing Investor Nerves

Inflation at a Crossroads: Old Fears and New Threats

All eyes are on the May inflation report, which is expected to show prices rising at an annual rate of 4% for the first time since 2023. The consensus among economists is for a headline figure of 4.2%, a number largely fuelled by the recent spike in energy costs following Middle East conflict. This is echoed by rising wholesale prices in China, which hit a nearly four-year high in May, driven by raw material costs linked to both the Iran conflict and the global AI investment boom.

However, the headline number is a look in the rearview mirror. With oil prices having already fallen from their peak before jumping again on the latest geopolitical news, the more important data lies deeper within the report. It is the month-on-month change in 'core' inflation that will truly dictate the market's reaction.

Why Core Inflation is the Real Story

Core inflation strips out volatile food and energy prices, giving a clearer picture of whether price pressures are spreading throughout the wider economy. April's data worried investors when it showed sharp rises in shelter and airfares, suggesting the oil shock was no longer contained to the petrol pump.

Today's report hinges on one number: the monthly core increase. A figure of 0.2% would suggest inflation is cooling, while a repeat of last month's higher figures (0.4% or more) would signal a persistent problem, likely forcing the central bank to consider further interest rate hikes. The most accurate public models suggest the figure will lean towards the cooler end, but investors are braced for an unpleasant surprise.

The New Chair and Historical Context

Complicating the picture is the new Federal Reserve chairman, Kevin Warsh, who has a different philosophy from his predecessor. At his confirmation hearing, Warsh signalled he is more inclined to look through price spikes caused by one-off geopolitical events, much like the Greenspan-led Fed did after the 1990 oil shock when Iraq invaded Kuwait.

This creates a fascinating tension: the market is pricing in the possibility of rate hikes, while the person in charge seems philosophically opposed to hiking rates in response to an oil-driven price surge. If core inflation comes in low, it would validate the new chairman's view and could lead to a very sharp market rally.

A New Inflation Headache: "Godzilla" El Niño

Just as investors hoped easing energy costs would cool inflation, a new threat is emerging from the weather. Forecasters are warning of a "supercharged" El Niño event in the Pacific this summer, with a high probability of it becoming an unusually powerful storm. Unlike isolated supply shocks, a severe El Niño can trigger simultaneous harvest failures across continents, putting crops like wheat, rice, sugar, and cotton at risk of significant price hikes.

A Glimmer of Hope: Falling Fertiliser Costs

Countering the bad weather news, a key agricultural cost has seen a dramatic fall. Prices for urea, a major component of fertiliser, have plunged by over 30% since mid-April, completely erasing the premium added during the Iran conflict. This has been driven by China easing export limits and increased output from South Asian producers, providing some welcome relief for food producers and, eventually, consumers.

AI Stocks Stumble as Market Hedges Bets

The artificial intelligence rally that has powered markets higher is showing serious signs of fatigue. The Nasdaq suffered its worst day since April 2025 this week, pushing the wider S&P 500 into negative territory for the month and near its lowest point since mid-May. The selling pressure has now spread into Asian markets, with tech giants like Samsung in South Korea and SoftBank in Japan seeing sharp falls, deepening the global tech downturn.

In a sign of the shifting mood, Wells Fargo is now advising clients to keep their AI stock holdings but to start hedging their bets. Their analysts suggest selling 'call options' against the shares—a strategy that collects immediate income but puts a ceiling on future profits. It is a clear signal that the easy-money phase of the AI boom is considered to be over, with a new focus on protecting gains rather than chasing further upside.

Oracle's High-Stakes Earnings

The debate over AI spending will be tested tonight when Oracle reports its quarterly earnings. The options market, which lets traders bet on price moves, is braced for a huge 12% swing in the share price, highlighting the uncertainty. Oracle is spending billions on data centres to meet demand from companies like OpenAI and Nvidia. The key question for investors is whether this debt-fuelled spending can generate profits before the market loses patience.

The Great AI IPO Race

Adding to the frenzy, OpenAI has confirmed it has confidentially filed to go public with a rumoured valuation near $1 trillion, likely aiming for a September debut. It joins a pipeline that includes Anthropic, which is also building investor interest ahead of a potential listing by announcing its latest model, Claude Fable 5, and SpaceX, which is set for its own public offering this week.

SpaceX's initial public offering (IPO) will be a major test of investor appetite. The company is taking an unusual approach, offering its shares at a fixed price of $135 rather than a variable range. It plans to stop taking orders on Wednesday ahead of the shares beginning to trade on Friday. In another unconventional move, it aims to allocate as much as 30% of the offering to retail investors, a far higher proportion than is typical.

The Cost of the AI Boom: A Cash Call

Investors have been reminded that the AI boom requires enormous capital expenditure. Super Micro Computer, a key maker of AI servers, announced plans to raise $7 billion through selling new shares. The company needs the cash to purchase components to fulfil a staggering $39 billion in recent orders.

This move highlights the cash-intensive nature of the AI buildout and follows a similar action by Google's parent company, Alphabet, which recently said it would issue $80 billion in new equity. These massive share sales dilute existing shareholders and signal that even for the biggest winners, growth in the AI sector comes at a very high price.

Regulatory Scrutiny Arrives

A new front of concern has opened up as US politicians turn their attention to the risks of AI. Senior congressional Democrats are pressuring the nation's largest banks, including JPMorgan and Goldman Sachs, to disclose how they plan to manage the threats posed by rapidly advancing AI. The request focuses on potential cyber threats and misuse of powerful new models, indicating that the 'move fast and break things' era of AI development may soon face regulatory headwinds.

The Disruptive Flipside: Web Builders Under Pressure

While some companies race to profit from AI, others are being threatened by it. Web-building platforms like Wix and GoDaddy have seen their share prices tumble. Investors are concerned that new, powerful AI tools will allow users to create sophisticated websites themselves, making the services of these legacy platforms less valuable. Despite these companies rushing to integrate their own AI features, the market remains sceptical, showing that for some business models, AI is more of a threat than an opportunity.

Geopolitical Tensions Boil Over as Trump Issues Warning

Geopolitical tensions have escalated dramatically after US President Donald Trump declared that Iran "will have to pay the price" and accused Tehran of taking "too long to negotiate a deal." The comments mark a significant shift away from the market's recent assumption that the conflict was a series of contained, tit-for-tat exchanges.

This hawkish turn sent a shockwave through pre-market trading, with stock futures falling sharply and oil prices jumping. The rhetoric undermines recent claims from the President that a peace deal was only "days away," and brings the risk of a wider conflict back to the forefront of investor concerns. The headline that would break this pattern and cause a much more severe market reaction would be the confirmation of US casualties.

Crypto Corner: Bitcoin Slips as New Risks Emerge

Bitcoin's price has faltered, slipping below the $63,000 mark for the first time since February as significant selling pressure emerged. Analysis suggests that long-term holders—wallets that have not moved coins in over five months—sold approximately $2.4 billion of the cryptocurrency in early June. This was compounded by a 13-day streak of continuous outflows from spot Bitcoin ETFs, investment vehicles that provide exposure to Bitcoin's price.

Analysts believe the weakness stems from investors re-evaluating the likelihood of central bank interest rate cuts and rotating capital into other hot assets like gold and AI-related stocks. The current pattern shows traders are selling into any small price recovery, rather than buying on dips.

The AI-Crypto Hype Cycle

The correction has been particularly brutal at the intersection of AI and cryptocurrency. Many so-called 'AI tokens'—digital assets linked to decentralised AI projects—have collapsed by 80-90% during the recent market downturn. This sharp divergence highlights a flight to quality: tokens for projects with no real activity have been wiped out, while those with measurable usage have fared better. It serves as a stark reminder that in the crypto space, as with AI stocks, hype eventually gives way to a demand for tangible results.

Politically-Linked Token Plunges

Highlighting the high-risk nature of some crypto-related ventures, shares in a company involved in a transaction with the Trump family have collapsed. The firm, previously known as Alt5 Sigma and now rebranded as AI Financial Corp., has seen its stock fall by over 90% since the deal was announced, prompting calls for an investigation by the Securities and Exchange Commission.

Prediction Markets Target Insider Trading

In a move to improve integrity in the speculative digital asset space, prediction market Kalshi has announced new measures to combat potential insider trading. The platform will now require employment details from some users and has enhanced its whistleblower features, following increased scrutiny of the sector.

Other Market-Moving News

• Visa & Mastercard Deal Approved: A judge has given preliminary approval to a $38 billion settlement between the card giants and merchants over 'swipe fees'. The deal means retailers will see a small reduction in the fees they pay.
• Apple's AI Woes Continue: Apple shares have continued to fall following its major AI reveal. Analysts are punishing the stock for its lack of a firm shipping date for its new Siri platform.
• Rivian's "Model 3 Moment": Electric vehicle maker Rivian has announced the arrival of its R2 SUV, a cheaper model starting around $46,000. This is seen as a crucial step to broaden its market appeal and follow Tesla's path to mass-market sales, though analysts do not expect the company to be profitable until 2030.
• Warner Bros. Takeover Arbitrage: Shares in Warner Bros. Discovery are trading with a 17% gap below their agreed takeover price by Paramount Skydance. This large discount reflects investor concern that state regulators may challenge the deal, though the buyer is confident enough to offer a 'ticking fee' if the deal is delayed.
• Bank of Canada to Hold Rates: Canada's central bank is widely expected to keep its interest rate at 2.25% today, with the Canadian dollar remaining weak against its US counterpart.
• Activist Targets Ashland: Activist hedge fund Ancora is pushing chemicals maker Ashland to put itself up for sale, arguing a deal could lift its share price by over 30%.
• Pentagon Blacklist Expands: The US Department of Defense has added several major Chinese firms, including Alibaba, Baidu, and BYD, to a list of companies with alleged links to the Chinese military.
• US Home Sales Rise: Sales of existing homes in the US saw their largest monthly increase of the year in May, rising 3.2% as income growth starts to catch up with property prices.

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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).