AI trading cools down and inflation returns! US stocks face two major risks

The Zhitong Finance App learned that market sources pointed out that the escalation of the situation in the Middle East is driving up oil prices, causing the risk of energy-driven inflation to return to the market, and expectations of the Federal Reserve's interest rate hike are rapidly heating up. As artificial intelligence (AI) trading cools down recently, key inflation data such as the US CPI and earnings season will be the focus of the market this week, and the results will directly affect the Fed's policy path and global stock market trends.

Analyst Damir Tokic said that the market is currently being dominated by two major themes — inflation and the AI bubble, and these two major factors are putting clear pressure on the stock market. He added that these two major themes will continue to dominate the market, especially as the US Consumer Price Index (CPI) data is about to be released this week and the earnings season is approaching. The analyst also pointed out that AI transactions have also experienced setbacks in the Asian market and dragged down the US semiconductor sector. He believes that this trend “is in line with the characteristics of the AI bubble gradually fading.”

Tokic said, “With the escalation of the situation in the Middle East, the market has now begun to take into account that the Federal Reserve will raise interest rates in September, and is expected to increase interest rates twice by May 2027.” “The risk of an inflationary shock caused by rising energy prices has returned to the market view.”

Although futures traders and forecasters still generally expect that the Federal Reserve will once again stand still at the July meeting, the possibility that the central bank will act at that time is rising. On Monday, market bets on the Federal Reserve's interest rate hike continued to heat up. According to CME's “FedWatch” tool, the current market predicts that the probability that the Fed will raise interest rates by 25 basis points on July 29 has risen to 46.5%, up from 34% last Sunday. On the prediction market platform Kalshi, traders currently expect the probability that the Fed will raise interest rates at 36%, higher than the level of less than 20% last Sunday, and far higher than the probability of less than 10% at the beginning of this month.

Market expectations for the Federal Reserve's interest rate hike are heating up after US President Trump announced the re-imposition of the blockade on Iranian ports near the Strait of Hormuz and the imposition of a 20% transit fee on all goods transported through the strait. With the recent tension in the US and Iran, international oil prices have risen again, increasing market concerns that inflation will remain high for a longer period of time and force the Federal Reserve to raise interest rates.

Therefore, investors will pay close attention to the upcoming release of key inflation data such as the US Consumer Price Index (CPI) and wholesale prices for June. This will be the last batch of inflation data released by the Federal Reserve before holding an interest rate meeting later this month, so it will provide an important clue for evaluating future interest rate prospects. Economists expect that the overall US CPI in June and the core CPI, excluding food and energy prices, will both slow slightly from May — the US CPI is expected to rise 3.8% yoy in June, lower than the 4.2% year-on-year increase in May — but both indicators will still be significantly higher than the Federal Reserve's 2% inflation target. Meanwhile, against the backdrop of another escalation in the US and Iran situation and the continued rise in oil prices, the inflation outlook is likely to become more complicated.

Neil Dutta, head of economic research at the macroeconomics and financial markets research institute Renaissance Macro, has further strengthened market concerns about possible action by the Federal Reserve. Duta said, “The US economy is currently closer to achieving the Federal Reserve's goals for economic growth and employment than it is to its inflation target. Therefore, based on recent changes in the Federal Open Market Committee (FOMC) wording, I think the threshold for the Fed to raise interest rates again is relatively low.”

Marc-André Vongern, general portfolio management advisor and director of Moelis & Company, warned that geopolitical conflicts could have a ripple effect on the credit market. “Simply put, the longer it takes for global oil transportation and the Strait of Hormuz to return to normal, the higher the probability that the Federal Reserve will raise interest rates further, and the more likely it is that the private equity market will be under greater pressure.” He finally warned, “We're walking on thin ice right now!”