The macro narrative became increasingly bifurcated this week. June inflation data reinforced the disinflation trend<\/strong> and pushed markets toward a less hawkish Fed outlook, while the sharp escalation in the US-Iran conflict and surge in energy prices materially increased the risk of renewed inflationary pressure<\/strong> over the coming months. Disruption across the Gulf and continued uncertainty around the Strait of Hormuz prompted markets to rebuild a geopolitical risk premium, with WTI crude rising 14.5%<\/strong> on the week to ~$82.50\/bbl<\/strong> and Brent climbing to ~$88.10\/bbl<\/strong>.<\/p>\n\n\n\n US inflation surprised materially to the downside. Headline CPI slowed from 4.2% to 3.5% YoY<\/strong>, while core CPI eased from 2.9% to 2.6%<\/strong> YoY after coming in flat m\/m (vs. +0.2% consensus). Core PPI also undershot expectations at +0.2% m\/m (vs. +0.4% consensus), reinforcing evidence that underlying inflation continues to moderate. However, the composition remained less benign, with energy prices still 15.7% YoY higher and gasoline prices up 26.7% YoY, suggesting the latest oil rally could reverse part of the recent disinflation by raising transport, freight, and input costs.<\/p>\n\n\n\n The broader US economy continued to point toward slower but resilient growth. Retail sales control group exceeded expectations (with May revised higher), industrial production increased 0.1% m\/m, and the Philadelphia Fed manufacturing index surged from 10.3 to 41.4, while new orders improved from 27.3 to 37.0. Consumer confidence also strengthened, with preliminary University of Michigan sentiment rising from 49.5 to 54.2, while one-year inflation expectations fell 0.4 percentage points to 4.2%. Housing remained the weakest part of the economy, with pending home sales (-5.4%), building permits (-3.0%) and homebuilder sentiment (34 vs. 36 prior) all deteriorating. Together with June payroll growth of just 57k and unemployment at 4.2%, the data continue to point toward a gradually cooling economy rather than a sharp slowdown.<\/p>\n\n\n\n Markets responded by reducing expectations for further Fed tightening<\/strong>, pricing 26bps of additional rate hikes by year-end, down around 5bps from a week earlier despite the renewed geopolitical tensions (and well below the ~40bps priced immediately after the latest escalation in Iran). Fed officials nevertheless maintained a cautious tone. Chair Warsh said there is “still work to do” on inflation despite the softer CPI report, while noting that AI-driven supply-side productivity gains are emerging faster than previously expected. Dallas Fed President Logan argued that one month of encouraging inflation data was insufficient to justify a policy shift, while New York Fed President Williams reiterated that inflation remains above target but policy is appropriately restrictive to return inflation toward 2%.<\/p>\n\n\n\n Outside the US, inflation continued to ease across Europe, although growth remained fragile. Eurozone CPI slowed from 3.2% to 2.8% YoY<\/strong>, while core inflation eased from 2.6% to 2.4%, supporting expectations that the ECB will leave rates unchanged this week. However, industrial production disappointed and sovereign yields remained elevated amid persistent fiscal and political uncertainty.<\/p>\n\n\n\n China also delivered a mixed macro picture. Q2 GDP growth slowed from 5.0% to 4.3% YoY, missing official targets and marking the weakest expansion in more than three years. However, industrial production accelerated to 5.3% YoY, unemployment fell to 5.0%, exports remained robust, and the trade surplus widened to a 17-month high of $125.6bn, highlighting continued strength in manufacturing despite weak domestic demand and ongoing property market pressures. Beijing also used the Shanghai AI conference to launch the World AI Cooperation Organisation (WAICO), signalling its ambition to play a leading role in global AI standards and governance.<\/p>\n\n\n\n Overall, the week’s data strengthened confidence that underlying inflation is moving in the right direction<\/strong> and that policy rates may be approaching their peak. However, the sharp increase in oil prices, elevated geopolitical uncertainty and the risk of renewed supply-side inflation materially complicate that outlook. A prolonged disruption to Gulf energy flows would likely reintroduce stagflationary pressures through higher fuel, freight and production costs, offsetting much of the recent progress on inflation.<\/p>\n\n\n\n Looking ahead, markets will focus on the July flash PMIs for early evidence of the conflict’s impact on global activity and pricing, the ECB policy decision, Fed Chair Warsh’s congressional testimony, US leading indicators and regional manufacturing surveys, alongside European confidence data and Japanese inflation and trade releases.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n US Treasury yields were little changed overall despite softer-than-expected June inflation data, as the market balanced improving disinflation trends against renewed upside risks from higher oil prices and geopolitical tensions. June CPI and PPI both surprised on the downside, with 1-year inflation swaps falling below 2% to 1.94%<\/strong> (the lowest since September 2024), while the 5-year inflation expectation remained anchored around 2.4%<\/strong>, reinforcing confidence that medium-term inflation expectations remain well contained.<\/p>\n\n\n\n Fed Chair Kevin Warsh maintained a hawkish tone, stressing that there is “plenty of work to do” before declaring victory over inflation and reiterating that price stability remains the Fed’s primary objective. While the market continues to price one additional hike this year, several fixed income investors argued that easing inflation, declining shelter costs and negative core goods inflation should allow the Fed to remain on hold, with the probability of further tightening gradually being priced out over coming months. Instead, the key macro risk has shifted back toward energy, with WTI approaching $80\/bbl<\/strong> and Brent above $85\/bbl<\/strong>. Higher oil prices are viewed as creating a double headwind by lifting headline inflation while simultaneously weighing on consumer spending through higher gasoline costs.<\/p>\n\n\n\n Curve views remained broadly constructive on intermediate duration. Several investors highlighted the 5-10 year sector<\/strong> as offering the most attractive carry, while expecting only modest curve steepening as additional Fed hikes are removed from pricing. Long-end yields were viewed as likely to remain range-bound around 4.5%<\/strong> for the 10-year Treasury, supported by resilient economic growth, strong fixed income inflows and continued heavy debt issuance linked to both fiscal financing needs and AI-related capital expenditure.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n US equities retreated this week as momentum unwound sharply, ending the recent leadership of AI and semiconductor stocks. The S&P 500 (-1.55%)<\/strong> and Nasdaq (-2.90%)<\/strong> snapped two consecutive weekly gains, while the Dow (-0.93%)<\/strong> also declined. The Russell 2000 (-0.52%)<\/strong> underperformed for a third consecutive week, reflecting broader risk-off sentiment despite signs of rotation into selected cyclicals.<\/p>\n\n\n\n Sector performance marked a notable reversal from recent AI-driven leadership. Energy (+4.97%)<\/strong> was the strongest performer, supported by higher oil prices and geopolitical developments, followed by Real Estate (+2.26%)<\/strong>, Consumer Staples (+1.40%)<\/strong>, Financials (+0.97%) and Healthcare (+0.07%). Technology (-3.78%)<\/strong> and Communication Services (-2.38%) were the weakest sectors, while Industrials (-1.36%), Materials (-1.35%), Consumer Discretionary (-1.28%) and Utilities (-0.52%) also finished lower.<\/p>\n\n\n\n The dominant theme was a sharp unwind in momentum across AI-related equities<\/strong>. The Philadelphia Semiconductor Index (SOX) fell 10%<\/strong>, its worst weekly performance since April 2025, pushing the index into bear market territory, while memory stocks declined even more sharply (DRAM -16.4%)<\/strong>. AI infrastructure names were broadly sold despite the absence of a clear fundamental catalyst, suggesting positioning, technical factors and profit-taking played a significant role after a prolonged rally. Investors rotated into regional banks, selected transports, retail and defensive sectors, while Apple (+5.8%) stood out as one of the few mega-cap technology winners.<\/p>\n\n\n\n The AI investment narrative also faced several incremental headwinds. Chinese AI developer Moonshot AI launched its open-weight Kimi K3 model<\/strong>, intensifying competitive concerns around frontier AI economics. Reports of increasing community opposition to large-scale data centre construction and growing investor positioning for a moderation in hyperscaler AI capital expenditure further weighed on sentiment. Additional headlines included Alphabet (-2.9%) delaying the launch of its latest Gemini model due to performance concerns, while Meta (-3.5%) was reported to be negotiating a $10bn multi-year compute lease with Anthropic, highlighting the enormous infrastructure commitments still required despite growing questions about long-term returns. IBM (-26%) recorded its worst week on record after weaker-than-expected software sales and weak guidance<\/strong>, as customers increasingly redirected spending toward AI infrastructure.<\/p>\n\n\n\n Corporate earnings were generally constructive<\/strong> outside technology. Large US banks delivered another strong quarter<\/strong>, with robust investment banking fees, record equity trading revenues and continued benefits from elevated capital markets activity linked to AI investment. While Goldman Sachs (+1%) and Morgan Stanley (-3.1%) both exceeded expectations, share price reactions remained mixed following strong pre-earnings performance. Netflix (-6%) declined after issuing revenue guidance below consensus expectations, reinforcing concerns that growth is beginning to normalise. In M&A, PayPal (+22.1%) surged after receiving a $53bn takeover proposal from a consortium led by Stripe and Advent<\/strong>, although PayPal’s board rejected the offer, citing valuation, financing and regulatory concerns. Separately, ATAI Life Sciences (+39.7%) rallied after agreeing to be acquired by Eli Lilly (-0.8%) for approximately $2.8bn in cash.<\/p>\n\n\n\n An additional development attracting investor attention was the sharp correction in South Korean equities<\/strong>, which highlighted the fragility of crowded AI positioning<\/strong>. After nearly tripling over the previous 12 months, the KOSPI has corrected by roughly 25% from its late-June peak<\/strong> as investors aggressively unwound semiconductor exposure. The selloff was heavily concentrated in Samsung Electronics and SK Hynix<\/strong>, which together had grown to represent more than half of the benchmark<\/strong>, leaving the market highly dependent on continued AI infrastructure spending and high-bandwidth memory demand. The decline was exacerbated by leverage<\/strong>, with roughly 1.2 million margin accounts reportedly affected, 320,000\u2013360,000 forced liquidations and broker-driven selling temporarily rising to more than 10% of daily activity versus a normal level of around 2%.<\/p>\n\n\n\n Korea provides a useful\u00a0case study of how concentrated positioning, leverage and dependence on AI CapEx materially increased the convexity of global equity markets<\/strong> and amplified market moves once sentiment turned. The US exhibits similar characteristics, with the ten largest constituents accounting for roughly 36% of the S&P 500 and margin debt rising to approximately $1.4\u20131.5tn, increasing the market’s sensitivity to volatility. The key risk is<\/strong> not necessarily a slowdown in AI investment, but a shift in investor preferences from rewarding aggressive AI CapEx to favouring capital discipline<\/strong> if monetisation continues to lag infrastructure spending. While such a shift would likely have only a modest impact on hyperscalers’ balance sheets, it could produce a much larger earnings and valuation shock for semiconductor, memory, networking and other AI infrastructure suppliers whose expectations remain tied to continued capacity expansion.<\/p>\n\n\n\n Equity positioning is increasingly fragile, with risk appetite near historical extremes just as the underlying liquidity impulse is becoming less supportive. AAII retail cash allocations have fallen to 14.6%, versus a long-run average of roughly 22%, among the lowest readings seen around the 1998, 2000, 2018, 2020 and 2021 market extremes, while equity exposure has risen to 71.0% and bonds stand at 14.4%. Options positioning shows similar exuberance: the equity put\/call ratio is near late-1990s and 2021 lows, a record 35% of the 100 largest S&P 500 stocks show inverted three-month call skew<\/strong>, and bullish strategies account for almost two-thirds of retail opening activity in mega-cap technology. This does not mean nobody is hedging: SPX and ETF put\/call ratios remain elevated at approximately 1.18 and 1.26, respectively, while Cboe SKEW is near 147. The picture is therefore one of active index hedging alongside aggressive demand for single-stock upside convexity<\/strong>.<\/p>\n\n\n\n Equity supply is also accelerating. US IPO issuance could reach $225 to $260bn in 2026<\/strong>, close to the more than $275bn 2021 record, while Dealogic estimates approximately $344.7bn of IPO, follow-on and convertible issuance already completed, and broader potential supply, including follow-ons, SPACs and lock-up expirations, could reach $1.175tn. Although $260bn is only around 0.4% of the S&P 500\u2019s more than $65tn market capitalisation, and buybacks may remain near $1.2tn, the key risk is a reversal from roughly $1tn of annual net share retirement toward as much as $500bn of positive net issuance, a $1.5tn deterioration in the corporate equity-flow impulse. None of these indicators is a precise timing signal, but the combination of low cash, concentrated call leverage and rising supply implies fewer marginal buyers, greater dependence on continued earnings and AI CapEx delivery, and materially higher convexity to disappointment. Maximum commitment on the surface, tightening underneath.<\/p>\n","protected":false},"excerpt":{"rendered":" Macro The macro narrative became increasingly bifurcated this week. June inflation data reinforced the disinflation trend and pushed markets toward a less hawkish Fed outlook, while the sharp escalation in the US-Iran conflict and surge in energy prices materially increased the risk of renewed inflationary pressure over the coming months. Disruption across the Gulf and […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1842","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"blocksy_meta":[],"yoast_head":"\n
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