Cooling inflation meets a renewed oil shock

Summary

Last week in markets

Markets ended a volatile week with a sharp rotation out of technology. The S&P 500 Total Return Index declined 1.55%, while the Nasdaq Composite fell 2.79%. Semiconductor stocks led the retreat as investors reassessed whether elevated AI infrastructure spending will generate returns that justify current valuations. Higher capital expenditure guidance from Taiwan Semiconductor, combined with increased competition from Chinese AI developers, added pressure to an already crowded trade. Financials and energy outperformed, highlighting the market's continued reliance on a concentrated group of technology leaders.

Despite the sharp rise in oil prices, Treasury yields moved modestly lower. The 10-year Treasury yield closed Friday at 4.55%, down one basis point from the previous week and seven basis points below Monday's level. Inflation data reinforced the broader disinflation trend. June CPI declined 0.4% month over month, while core CPI was unchanged, bringing annual inflation to 3.5% and 2.6%, respectively. Producer prices fell 0.3% during the month, though the annual rate remained elevated at 5.5%. Retail sales increased 0.2%, pointing to continued, albeit measured, consumer spending.

The market's primary focus shifted to energy. Brent crude rose 9.6% on Monday to $83.30 per barrel before climbing another 4.6% on Friday to close at $88.10. The nearly 16% weekly gain reflected escalating conflict around the Strait of Hormuz and renewed concerns about global energy supply.

The week ahead

While the U.S. economic calendar is relatively light, this week's data will help shape expectations ahead of the Federal Reserve's July 28 and 29 meeting.

The Conference Board's Leading Economic Index is released Monday, followed by weekly jobless claims on Thursday. Friday's flash manufacturing and services PMIs will offer one of the first readings on business activity in July, while June new home sales will provide another measure of housing demand amid elevated mortgage rates.

Stronger economic data would reinforce expectations that the Federal Reserve can maintain a restrictive policy stance for longer. Weaker readings could support Treasury markets, although higher energy prices may temper expectations for near-term policy easing.

The European Central Bank meeting on Thursday is the week's primary central bank event. After raising its deposit rate by 25 basis points to 2.25% in June, the ECB is widely expected to leave policy unchanged. Markets will focus less on the rate decision and more on policymakers' assessment of the renewed energy shock. A more hawkish assessment of oil's potential impact on inflation and wages could support the euro while pressuring European government bonds. A more measured tone would suggest the ECB continues to view the increase in energy prices as manageable, even with inflation remaining above target.

Geopolitics is likely to remain the dominant market driver. U.S. strikes on Iran over the weekend, following the deaths of American troops and the collapse of an interim agreement, increase the likelihood that markets begin the week with a higher geopolitical risk premium. Investors will closely monitor shipping activity through the Strait of Hormuz, Iran's response, and any expansion of threats to energy infrastructure across the Gulf and Red Sea.

Earnings will also remain in focus. Alphabet and Tesla report on Wednesday, followed by Intel on Thursday. After last week's selloff in technology shares, investors are likely to place greater emphasis on capital spending discipline, margin outlooks, and evidence that AI investments are translating into sustainable revenue growth, rather than on headline earnings alone.