Despite last Friday’s market panic, followed by dips on both Tuesday and Wednesday this week, markets look to finish the week higher. Much of the volatility has to do with the lack of a resolution to the war with Iran, including continued threats of further military strikes. Recent earnings announcements by Broadcom and Oracle beat expectations but didn’t raise guidance or reported further debt and equity issuance. And a strong job report last week has everyone wondering how the Federal Reserve (Fed) can possibly lower interest rates in the face of rising inflation and a seemingly strong labor market.
Last week, the jobs report showed that 172,000 jobs were created in May, far eclipsing what analysts had expected. This week we learned that the Consumer Price Index (CPI) rose at an annual rate of 4.2% in May, reaching its highest level in three years. While you might think that an inflation rate this high would cause concern, it was met with ambivalence. The question remains, what will the Fed do next Wednesday when it meets for the first time under the leadership of its new chair, Kevin Warsh.
To be fair, much of the increase in inflation came from the price of energy which grew by 3.9% in a single month, pushing the 12-month energy inflation rate to a staggering 23.5%. This spike was overwhelmingly driven by a 7.0% monthly jump in gasoline prices due to supply disruptions caused by the military conflict with Iran. The good news is that there could be, and I stress could be, a deal in the works if recently leaked reports are true. Excluding food and energy, Core CPI came in at 2.9% year-over-year and shows a slowing trend over the past couple of months. However, the Producer Price Index (PPI), which was released yesterday, revealed that wholesale inflation accelerated sharper than expected, surging 6.5% year-over-year. Like CPI, much of the increase can be chalked up to energy costs. This is the fastest pace of wholesale inflation since November 2022.
One point worth noting is that we’ve seen a rotation of money coming out of the tech sector. Despite the SpaceX IPO today, the broader underlying trend in June shows institutional investors pulling back heavily from crowded artificial intelligence and semiconductor trades. This structural shift has pushed the tech sector into official correction territory, down roughly 11% from its recent peak. If you’re wondering why, some speculate that it has to do with the Fed keeping interest rates higher for longer. The CPI and PPI reports certainly support this argument. Others are questioning the eye-watering capital expenditures required to build out infrastructure and the return on investment required to make these expenditures profitable. And lastly, some are looking to build cash ahead of the impending IPO megadeals including SpaceX, OpenAI, and Anthropic.
In closing, you are probably aware the FIFA World Cup is now underway. This is the world’s most prestigious soccer tournament, running from June 11 to July 19 across 16 host cities in the United States, Canada, and Mexico. But that’s not what I wanted to mention. I learned today that World Cup betting is expected to exceed $50 billion and become the biggest betting event in history. For comparison, the 2022 World Cup in Qatar saw $35 billion in bets. To put that scale into perspective, gaming executives note that the volume of money being wagered over the next six weeks will roughly equal eight to ten Super Bowls combined. If you’re wondering why the spike in betting, it boils down to more matches, more teams, U.S. legalization of betting, favorable time zones, and the rise of prediction markets. I would never advocate for betting, but if you do, good luck. Now you know.
Bruce J. Mason, MBA
