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AI, Oil & Military Technology
Demand for AI computing continues to exceed supply. That was the reassuring takeaway from three companies’ June-quarter earnings reports that breathed new life into worry-prone AI stocks. Jackie summarizes how the CEO of CoreWeave characterized the strong and rising demand for his company’s cloud computing services. … Also: Oil prices haven’t surged catastrophically as the Iran/US war has dragged on—yet. The measures tethering prices have time limits, though. The longer the war lasts, the higher oil prices could go. … And in our Disruptive Technologies segment, a look at the military uses of drones.
July CPI: The Fed Is Still In The Woods
The July CPI report was good news for Fed officials and the rest of us. Inflation is moving closer to the Fed's 2.0% target. However, the inflation picture may not be as bright as the CPI report suggests. New York Fed President John Williams recently said that if core PCED inflation readings remain above 0.2% m/m during the second half of this year, then the Fed should tighten monetary policy. The Cleveland Fed's Inflation Nowcasting model continues to estimate a 0.25% m/m increase in core PCED inflation for July and 0.27% for August. The Fed gives more weight to the core PCED than the core CPI in setting monetary policy. That helps explain why the 2-year US Treasury yield remains roughly 75 basis points above the federal funds rate, suggesting that fixed-income markets continue to expect a Fed rate hike in the coming months (chart). The 10-year Treasury yield also remained elevated, at 4.68%, after the CPI report. Nevertheless, the July CPI report was broadly a good one. So the odds of a Fed rate hike at the September meeting declined on the news. Consider the following: (1) CPI inflation (m/m). July's headline CPI rose by just 0.1% m/m, as declines in energy-related categories weighed on the index (chart). Core CPI rose at a subdued pace of 0.2% in July, indicating that underlying inflation pressures did not intensify materially during the month. Core goods and core services prices increased by just 0.2%. The durable goods CPI rose 0.3% m/m in July (chart). Prices for computers, peripherals, and accessories surged 3.2%, which suggests that rising memory-chip costs tied to the AI buildout are feeding through to consumer electronics prices. The nondurable goods CPI fell 0.3% m/m, as declines in energy-related categories more than offset price increases elsewhere (chart). Notably, prices for computer software and accessories rose another 0.5% after jumping 2.3% in June, reflecting pricing power from strong demand for AI-enabled software. The CPI for services rose 0.2% m/m (chart). Weak shelter inflation, partly reflecting a 1.1% decline in lodging away from home, and a 2.1% drop in car and truck rental prices helped keep services inflation in check. These declines offset increases in airline fares and several other service categories. (2) CPI inflation (y/y). Headline CPI inflation eased to 3.4% y/y (chart). Core CPI inflation slowed to 2.5% y/y, its lowest reading since March 2021, bringing underlying inflation closer to the Fed's 2.0% objective. While the CPI less shelter remains elevated at 3.4% y/y, it is running at just 1.9% once food and energy are also excluded (chart). Encouragingly, supercore CPI inflation continued to moderate in July. However, at 3.0% y/y, it too remains above the Fed's 2.0% inflation target (chart). In the past, core CPI inflation tended to exceed the core PCED inflation rate by 0.5ppt on average (chart). In recent months, the latter has been running hotter than the former. Other economic data continue to underscore the remarkable resilience of the US economy. Consider the following: (3) Consumer spending. Consumer spending continues to expand at a brisk pace. Redbook same-store sales rose 8.3% y/y in the week ended August 7, well above the 2025 average of 5.8% (chart). Redbook sales increased an average of 8.25% y/y in July. (4) Small business owners survey. Job openings and hiring plans among small businesses improved in July. During the month, 20% of small business owners plan to increase employment over the next three months, the most since October 2022 (chart). In addition, 51% reported no qualified applicants for job openings, the highest since September 2024. The data suggest labor demand remains robust, but hiring continues to be constrained by skills shortages, rising retirements, and slower immigration growth. The percentage of small business owners raising selling prices moderated to 31% in July, and 28% are planning to raise them (chart). Both measures remain relatively high. (5) ADP weekly job growth. For the four weeks ending July 25, private employers added an average of 8,250 jobs per week, according to ADP (chart). This suggests monthly payroll growth of roughly 33,000, a pace that’s likely sufficient to keep the unemployment rate near its current low level given ongoing labor supply constraints.
On AI Again & Earnings Again
The AI infrastructure buildout is increasingly being funded by Wall Street’s complex financial concoctions. The deals hinge on projections of AI end-user demand, some of which is unproven so far, and they could fall apart if the projections aren’t met. What then? Would AI go from boom to bust à la the housing market circa 2008? Probably not, says Melissa, though she points out the vulnerabilities in the AI ecosystem posed by creative financial engineering. … Also: Joe assesses the impacts of two big companies’ MTM gains on the S&P 500 companies’ collective Q2 and projected earnings.
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