Inflation Concerns Explode as Oil Surges and AI Spending Worries Jump
Inflation concerns have been simmering for months, and they are suddenly exploding. Oil jumped the most since 2020 on Monday, with Brent up 9.6% in a single session.
Meanwhile, concerns about the impact of AI capex spending are gaining traction, and there are clear signs the Fed is ready to react.
The Inflation Story Comes to a Head
Brent is trading around $86, driven by a 20% cargo fee to pass through the Strait of Hormuz. A blockade is being reinstated and the U.S. struck Iran for the third straight night. The market is no longer treating oil spikes as “transitory.” There is concern about a prolonged disruption, with the strait not expected to normalize this year. This is the worst-case scenario for oil.
The AI capex concern is also gaining traction. Torsten Slok, the chief economist at Apollo, published a note arguing that a slower AI payoff would be a problem for everyone. The worry is no longer just about individual chip margins. It is about whether the enormous spending on data centers, servers, and infrastructure produces the returns the market has been forecasting. If the payoff slows while the spending keeps generating inflation, that presents a difficult conundrum for the Fed.
The Fed Is Ready to React
We have the CPI Report at 8:30 a.m. ET and Fed Chair Kevin Warsh’s first congressional testimony at 10:00 a.m. ET this morning, but the market is already anticipating a hawkish tone. The Fed Funds futures now fully price a hike at the October meeting with a second by March 2027. This month’s meeting is about 60/40 favoring a hold, which means the odds of a near-term move are no longer trivial.
The move toward rate hikes is accelerating. Coming into the year the market expected cuts. Now it is looking for a tightening cycle.
Fed Governor Waller said Monday that the central bank may need to raise rates in the near term if inflation stays well above target, and he named AI spending as a lasting inflation driver. When the Fed itself is recognizing the problem, the pressure to act builds.
Banks Kick Off Earnings
JPMorgan Chase ($JPM), Bank of America ($BAC), Citigroup ($C), Wells Fargo ($WFC), and Goldman Sachs ($GS) all report before the open. The banks have beaten for eight straight quarters, so the headline numbers will probably be fine. The headline numbers are not the key issue, however. The guidance is what matters, and the questions on the earnings calls about inflation, credit quality, and the rate outlook will tell us more than the reported figures.
The banks are the first real read on how corporate America is thinking about the inflation and rate picture. Their commentary will set the tone for the rest of the second-quarter earnings season.
Chips Get a Relief Bounce
The chip names are bouncing Tuesday morning as investors reflect on continued memory shortages and high margins. The Korean names rebounded overnight after Monday’s rout, and that is lifting the group.
While the bounce is good for the VanEck Semiconductor ETF ($SMH), it carries an awkward twist. The same pricing power and shortage story that supports the chip stocks is itself inflationary. Strong chip pricing feeds the exact problem that is pressuring the broader market.
Game Plan
My game plan is to play stronger defense and not let some recent losses build. I am seeing pullbacks I want to buy in front of some earnings reports in the next few weeks, but I am in no rush. The names on my list are not going anywhere and the setups will still be there once the inflation picture clarifies.
Volatility is going to be elevated as the market deals with the inflation issue, and that means trades need to be kept on shorter time frames. When the backdrop is this uncertain, holding positions for longer stretches exposes you to headline risk you cannot control. Shorter time frames let me stay flexible and reduce quickly if the action turns.
I have high cash levels and I am comfortable being patient. The setups will come, and they will be better after the market works through the CPI print, the Warsh testimony, and the first wave of earnings. We have a flood of news to navigate and the best course of action is to let it settle before making any big moves.
At the time of publication, Rev Shark had no positions in any securities mentioned.
