A Reuters Open Interest newsletter

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

U.S. stocks jumped and yields fell on Tuesday after a surprise fall in U.S. inflation cooled investors' bets on how aggressively the Federal Reserve will need to raise interest rates, even as US-Iran hostilities pushed oil prices to a one-month high.

In my column today, I look at how AI bulls and bears are doubling down on their convictions, even as the fog of uncertainty around the technology's profit-generating powers is thickening. Higher volatility, anyone? 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Cool on the Hill

A surprising downside shock in U.S. CPI inflation on Tuesday was followed by the first major public remarks from recently-confirmed Fed Chair Kevin Warsh to U.S. lawmakers. The CPI print undoubtedly gives the Fed some breathing room, but it will be limited. 

Even if headline and core inflation drift further away from 4% in the coming months, oil is rising again and the economy is still running hot. The Fed's 2% target remains some way off, and we are now into the sixth year of above-target inflation. Warsh repeated his commitment to price stability, as one would expect, but he'll be hoping PCE follows CPI and buys him more time.   

* Trading places

Chinese imports surged 36% in June, the fastest rise in five years. A sign that domestic demand is finally recovering, right? Not quite. Export growth continues to soar too, especially autos and AI-related goods, putting the country on track for another $1 trillion-plus trade surplus this year.  

June investment and retail sales figures on Wednesday will offer further insight into how the domestic economy is faring, and Beijing will also release Q2 GDP. The consensus is for 4.5% growth, down from 5.0% in Q1.

* A vol order

If you wanted evidence of brewing AI-related equity volatility, you got it on Tuesday - in spades - from U.S. computer giant IBM. Shares plunged a record 25% after the company said it had 'faltered' in keeping pace with a shift in corporate spending from software to data-center infrastructure and would take a big earnings hit in Q2. 

The fall was even steeper than its fall on "Black Monday" on 19 October, 1987, still the biggest single-day decline on record for Wall Street's main indexes. Realized volatility in single stocks is rising, and in big names too, as IBM shows. It still hasn't spilled over into meaningful index volatility yet, but what if the next 20%-plus pop is in one of the 'Mag 7' stocks?   

There's a paradox developing on Wall Street: the fog of uncertainty surrounding artificial intelligence's ability to deliver sky-high profits is thickening, yet AI bulls and bears alike seem to be doubling down on their convictions.

The bigger the numbers involved — whether for spending, profits or returns — the more entrenched advocates on both sides of the argument become. And many of these AI numbers are astronomical.

Wall Street research highlights this growing entrenchment, and the latest Bank of America fund manager survey speaks to it. A record 82% of respondents think the ‌AI trade is the most crowded, but roughly half still say we're not in a bubble.

This curious conundrum could set the stage for a more volatile second half of the year and a particularly bumpy few weeks as the second-quarter U.S. earnings season kicks off, with investors on both sides looking for evidence that they are correct.

Despite all the fears about dollar debasement, investors in a foxhole still want - and need - dollars.