An AI-related breakthrough in China renewed concerns over lofty tech sector valuations and proved a stronger headwind for equity markets this week than rising oil prices amid the re-escalation of hostilities in the Gulf. The Nasdaq fell nearly 3% this week, while Asian markets saw much steeper declines of 6-8%, as investors worried that the potential emergence of lower-cost AI models could undermine the returns from the ongoing capex boom in data centres. WTI Brent crude lifted more than 15% to around $82/bbl, its highest levels in a month. Despite this, UST yields declined as pricing for Fed rate hikes moderated after inflation data for June was cooler than expected - but multiple Fed officials, including Chair Warsh said inflation risks have not abated. USD upside, having rallied more than 3% over May and June, remained capped.
Fed rate-hike expectations for the July meeting have eased from around 40% to a 10% chance after US inflation pressures eased and retail sales were moderate. One Fed hike is expected this year. With gasoline prices falling by almost 10%, headline inflation declined by 0.4% in June, slowing the annual rate from 4.2% to 3.5%. The core rate also softened from 2.8% to 2.6%yr on a flat month-on-month figure. This was subsequently backed up producer prices also falling in June (-0.3%) and rising less than expected after excluding food and energy (0.2%). Retail sales rose 0.2%m/m in June, well down from May's 0.9% gain, though lower gasoline prices were the main driver. However, control group sales - a gauge that remove gasoline and other volatile items - also slowed to 0.5%m/m from 0.8% in May.
Re-escalating hostilities in the Gulf and renewed pressure on oil prices have come at a time where energy inventories in Europe are causing some concern. While the ECB is expected to hold steady at next week's meeting, this backdrop keeps the chance of further tightening in play. The ECB have strongly pushed back on views that the hike last month was an insurance hike, while the June forecasts also incorporated at least two rate hikes. In the UK, BoE Governor Bailey said that the fragile situation in the Gulf presented risks to the UK outlook. Meanwhile, Gilts responded favourably to reports that PM in waiting Burnham may appoint a more fiscally conservative Chancellor.
