Oil Undoes the Inflation Relief
Oil rose about 10% this week, which wipes out the good news from the June CPI report. The gain in crude is already feeding through to gasoline prices at the refined level, and that refined price matters most for what people actually spend. Because of this, it is hard to pull any clear signal from recent inflation data. The PCE inflation measure lags so far behind that June data still is not out, so it barely counts right now. Some core components eased, especially a few tied to AI, but the oil move overrides that.
Next Week's Fed Meeting Is a Coin Flip
The Fed decision next week looks like a coin flip. Some members have argued strongly for hiking rates, while others say policy sits in a decent spot already. Little has been said since the sharp jump in oil, so their read on that increase is the key thing to watch if they hold rates.
It could be a live meeting, but a rate hike is not the base case. The old habit of taking clues from the Fed funds futures market no longer gives much confidence. Before the war era, and especially when the Fed was hiking, it rarely surprised the market. Bloomberg implied probabilities, drawn from those futures, showed that when a hike, cut, or hold looked very likely, the Fed usually followed through. Surprises were few. When the market was not positioned right, articles would sometimes appear, possibly planted, to steer markets the right way. That pattern may not hold now, because how Kevin Warsh is thinking about the market is unclear.
Right now the implied odds of a hike sit around 30 to 33%, roughly one in three. That level would not stop the Fed from hiking, but a hike is not expected. The good inflation reading earlier this month buys the Fed some time, though one month does not make a trend. If oil keeps climbing or flows into other parts of spending and core inflation, a hike becomes more likely. A call is harder still with President Trump threatening a major escalation in the Iran war next week.
Earnings: High Bar, Muted Reaction
The muted market reaction to earnings is no surprise given how high estimates sat going in, both for this quarter and the full year. Through the year, estimates and revisions kept getting upgraded. That was true not just for the S&P 500 as a whole but across nearly every sector, fairly evenly spread. When expectations sit that high, the market struggles to get excited about what comes next. Even this morning, some companies beat on the top line and bottom line and raised guidance, yet drew no favorable reaction.
Earnings are not a powerful market driver right now. What is taking over is a broader rotation inside the mega-cap AI names, plus the war reasserting itself as a primary driver. That shows up under the surface in energy and anything commodity-related.
Credit Markets Flash Early Caution on Tech
Broad credit markets are not pricing in seriously bad news, which is a good sign. Over the past month, investment grade spreads rose only modestly, a handful of basis points. Under the surface, technology spreads widened much more than the broad market. That points to a rotation out of the big hyperscalers, driven by their large capex plans, the huge supply of new bonds hitting the market, and a search for diversification against those risks.
Two risks stand out with tech bond issuance. First, plain supply and demand: heavy new supply without enough demand pushes spreads and yields higher and prices lower. Second, and more important, the ultimate return on all this investment over time, which is a big wild card.
One view echoed by several market watchers: Oracle could fall to junk status, and if it taps the brakes on spending, money could rotate back into a name like that.
Even so, outside of tech, spreads are very well behaved. That supports a still-favorable view on investment grade. Corporate profits look good and balance sheets look sound, so the core view has not changed, though bumps can come and the wave of hyperscaler and tech issuance stays worth watching.
