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On AI’s Revenues, Gold’s Outlook & Blockbuster Earnings
Can investors really expect that today’s ravenous demand for AI will keep growing at the clip providers expect over the coming years? AI bears say no, but Ed and Melissa disagree. Her back-of-the-napkin reality check found that Anthropic’s firm’s $150 billion 2030 revenue forecast looks doable. … Also: Ed and William discuss the outlook for gold in the wake of its price drop. If support holds at $4,000 an ounce, they could see a rebound to $5,000 by year-end without any weakness in the dollar. … And: Joe’s data show that analysts’ earnings estimates for S&P 500 companies have shot up over the course of last quarter, which is highly unusual.
A Refreshingly Cool CPI Inflation Report Must Please Warsh
Will the FOMC raise the federal funds rate (FFR) at its July 28-29 meeting? Foggetaboutit! Today's CPI inflation report was surprisingly subdued across the board. Inflation remains above the Fed's 2.0% target, so the FOMC is likely to maintain its tightening stance, which was adopted in June. However, after the latest inflation report, there is no rush for the FOMC to act, contrary to our earlier expectations. Our Roaring 2020s scenario may be working its magic as productivity growth has reduced unit labor cost (ULC) inflation to 0.5% y/y during Q1-2026 (chart). During the previous inflation surge, ULC inflation soared due to a significant wage-price spiral, which isn't happening this time. Let's review today's important Fed-related developments: (1) Warsh's Spin. The topic of inflation dominated Kevin Warsh’s first congressional testimony as Fed chair today. He stressed that the Fed has “no tolerance for persistently elevated inflation” and remains committed to returning inflation to 2%, arguing that inflation is ultimately the responsibility of monetary policymakers. Warsh cautioned against viewing June’s lower-than-expected CPI inflation report today as “mission accomplished,” emphasizing that the Fed’s credibility depends on restoring price stability. At the same time, he was enthusiastic about the AI boom, which he saw as a reason to be optimistic about the outlook for the economy and inflation. He said that the spending on data centers, software, and infrastructure should boost productivity, raise the economy’s non-inflationary growth rate, and help ease inflation pressures over time. His core message was that the Fed must stay focused on inflation while recognizing AI’s potential to support stronger, less inflationary growth. In other words, the new Fed chair endorsed our Roaring 2020s narrative! (2) CPI Inflation (m/m). Warsh’s testimony was accompanied by a surprisingly subdued June CPI inflation report. The headline CPI fell 0.4% m/m, the first monthly decline in six years, led by a big 9.7% m/m drop in gasoline prices (chart). However, the moderation was widespread, with the core CPI unchanged. Core goods prices fell 0.1%, and core services remained unchanged. The durable-goods component of the CPI was unchanged m/m (chart). Notably, prices for computers, peripherals, and accessories fell 1.3%, suggesting that the recent surge in memory chip prices has yet to feed through to consumer electronics. With Apple and Microsoft announcing price increases, this category could soon become a larger source of inflation pressure. The nondurable goods CPI fell 1.5% m/m, driven largely by energy-related categories (chart). The main source of inflation was computer software and accessories, which rose 2.3%. This category is where AI-related inflation is most apparent, as strong demand for AI-enabled software has allowed providers to raise prices. The CPI for services was unchanged m/m in June (chart). The weakness reflected the lowest monthly shelter inflation since January 2021, as well as a decline in lodging away from home. (2) CPI Inflation (y/y). Headline inflation moderated in June but remained elevated at 3.5% y/y (chart). At 2.6% y/y, core CPI inflation is much closer to the Fed's 2% target. We have long argued that the CPI excluding shelter (especially owner's occupied rent) provides a clearer view of underlying inflation, given the lagged nature of shelter inflation. While the CPI less shelter remains elevated at 3.6% y/y, it is running at just 2.1% once food and energy are also excluded (chart). What is keeping inflation elevated are services and nondurable goods, which both moderated in June. Durable goods inflation is back in deflationary territory (chart). A notable divergence has emerged between the PCED and the CPI for durable goods inflation (chart). The former is clearly rising, while the latter is edging lower. Used car prices have been falling (chart). They carry a larger weight in the CPI than in the PCED and therefore provide a stronger disinflationary tailwind for the former. In addition, the surge in software prices is boosting the durable-goods component of the PCED, as software is classified as a durable asset, whereas the CPI for durable goods excludes software entirely. Encouragingly, the CPI supercore inflation rate moderated in June but remains elevated at 3.1% y/y (chart). The bottom line: June’s CPI report reduced the urgency for a Fed rate hike. However, the AI buildout and tariffs will likely keep goods inflation elevated, while the disinflationary support from lower energy prices will fade in July as oil prices rebound. Additionally, the resilience of the US economy will likely keep underlying inflation sticky. As a result, inflation risks remain skewed to the upside, keeping a 2026 rate hike on the table.
On EMs & Iran War 2.0 Plus: South Korea’s AI Bet
The resumed US-Iran war will hit Asian nations hard, William reports, destabilizing weak currencies and struggling economies. The rupiah, rupee, yen, and won all have come under renewed pressure, and another oil-supply shock could further depress currencies, increase dollar debt, and raise bond yields. Developing economies are vulnerable as well to second-round effects like food inflation. … Also: Investors looked to the Nasdaq debut of Korea’s SK Hynix for clues to the AI craze’s durability and Korea’s role in it. When the shares sold off on Monday, doubts were kindled. … Toby cautions against reading too much into the activity of a single stock and argues that the Asian AI trade has solid fundamental underpinnings.
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