AI euphoria faces an inflation reality check

Summary

Last week in markets

Risk assets finished the week higher, although gains remained concentrated in a narrow group of AI and semiconductor companies. The S&P 500 Total Return Index rose 1.26% week over week, while the Nasdaq Composite gained 1.7%. The Dow Jones Industrial Average declined 0.5%, and the Russell 2000 fell 0.6%.

Investor enthusiasm for AI remained a key driver. SK Hynix's record U.S. ADR offering reinforced demand for the sector, raising $26.5 billion, pricing at $149 per share, and closing its first trading session at $168.49, a gain of 13.1%.

Fixed income markets told a different story. The 10-year Treasury yield rose to 4.56% from 4.48% at the start of the week, reflecting continued uncertainty around inflation and the path of monetary policy.

Energy markets kept inflation risks in focus. Brent crude climbed from roughly $72 per barrel to settle at $76.01, up 5.4% for the week, as renewed tensions involving the U.S. and Iran, along with attacks on commercial shipping, renewed concerns about potential disruptions through the Strait of Hormuz.

Economic data continued to point to a resilient economy. ISM Services increased to 54.0, employment returned to expansion at 51.2, the prices index eased to 67.7, and initial jobless claims declined to 215,000. Taken together, the data suggest demand remains healthy, even as higher energy prices, tariff uncertainty, and questions surrounding the Federal Reserve continue to limit relief in longer-term interest rates.

The week ahead

Inflation data will set the tone early in the week. June CPI will be released Tuesday, followed by June PPI on Wednesday. These reports will help determine whether recent increases in energy prices, tariff-related costs, and resilient services demand represent temporary pressures or the beginning of a more persistent inflation trend.

A softer-than-expected core inflation reading could help stabilize Treasury yields and support broader equity markets. Conversely, continued strength in services inflation or tariff-sensitive goods would likely pressure equity valuations and reinforce expectations that the Federal Reserve will maintain a restrictive policy stance for longer.

Attention will also turn to the Federal Reserve. Chair Kevin Warsh is scheduled to deliver the Semiannual Monetary Policy Report to the House Financial Services Committee on Tuesday and the Senate Banking Committee on Wednesday. The Federal Reserve will also release its Beige Book on Wednesday afternoon.

Markets will seek greater clarity on how policymakers are balancing inflation that remains above target with a labor market that is still healthy but showing signs of moderation. Commentary on wage growth, consumer spending patterns, credit demand, and corporate margin pressure could provide additional insight into how inflationary pressures are evolving across the economy.

The second half of the week shifts focus to broader economic activity. Thursday brings retail sales, initial jobless claims, the Philadelphia Fed Manufacturing Survey, and business inventories. Friday includes import and export prices, housing starts, industrial production, and preliminary University of Michigan consumer sentiment.

Retail sales and labor market data will offer an updated view of household and employer resilience in the face of higher borrowing costs. Housing and industrial production will provide another measure of whether elevated long-term interest rates are beginning to weigh more meaningfully on economic activity.

Geopolitical developments remain an important wildcard. Any renewed disruption to shipping through the Strait of Hormuz could quickly increase energy prices and complicate the inflation outlook before this week's economic data provide a clearer picture.