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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a fascinating week where the big-picture economic news actually got better while the stock market itself struggled. The dominant story was a global selloff in technology and AI stocks, even as oil collapsed to pre-war lows and inflation likely hit its peak. Underneath the surface, a healthy rotation appears to be underway, with money moving out of the crowded tech trade and into the rest of the market.
The week was defined by tech weakness. The trouble started overseas and spread fast. On Tuesday, South Korea's chip-heavy KOSPI index plummeted nearly 10%, its steepest drop in more than three months, as overseas investors dumped chip stocks on signals that the sector's rally had become overheated. That triggered a broad global rout in semiconductors. In the U.S., the S&P 500 fell 1.44% and the Nasdaq dropped 2.21%, with most of the damage concentrated in the high-flying semiconductor sector, while volatility surged. The selling pressure persisted through the week. By Friday, stocks were lower again amid a global tech selloff as investors worried about mounting costs tied to AI data centers, compounded by reports that a major AI company is leaning toward delaying its public offering until next year.
Here is the encouraging part. The money leaving tech is not leaving the market entirely. Investors have been rotating their money into sectors beyond tech, a potentially healthy development even as the mega caps lose ground on worries about spiraling AI costs. On Friday, even as the Nasdaq fell, small-cap stocks actually rose, a clear sign of that rotation at work. For a market that has been dangerously dependent on a handful of AI names all year, a broadening out is arguably a sign of health, not weakness.
The most important macro development was the continued collapse in oil, which is the key to the entire inflation story. On Wednesday, Brent crude fell more than 4% to settle around $73.74 per barrel, its lowest level since before the war began at the end of February, while U.S. crude dropped to around $70. Oil is now essentially back to where it was before the conflict, erasing the entire war premium. Treasury yields fell as oil slid, with the 10-year note dropping below 4.5%. This is a powerful disinflationary force that should feed through to lower inflation readings in the months ahead.
That backdrop made Thursday's inflation report easier to digest, even though the headline number was alarming on its face. The PCE index, the Fed's preferred inflation gauge, rose to a 4.1% annual rate in May, the highest since April 2023, with core inflation running at 3.4%. But this is backward-looking data that does not yet reflect June's oil collapse. Analysts noted that May's report could mark the peak of the inflation surge, since crude prices have eased sharply in June amid the reopening of the Strait of Hormuz. Markets took the report in stride, with stocks holding up and yields slipping after the release.
The one cloud that darkened late in the week was renewed friction in the Middle East. On Friday, Trump said Iran had committed a foolish violation of its ceasefire by attacking ships in the Strait of Hormuz, days after Iran accused the U.S. of violating the agreement, continuing a streak of finger-pointing that threatens to destabilize the negotiating period many investors had bet would end the conflict. This is the key risk to watch. The entire disinflation story rests on the ceasefire holding and oil staying low.
The bottom line on the week: the macro picture genuinely improved, with oil back at pre-war levels and inflation likely peaking, but the stock market wobbled as the AI trade finally cracked under valuation and cost concerns. A rotation out of tech and into the broader market is healthy, but the fragile Iran ceasefire remains the wildcard underneath everything.
What's Coming Next Week
The marquee event is the June jobs report. It lands Thursday, July 2, a day earlier than usual because of the July 4 holiday weekend, with U.S. markets closed Friday. The labor market has been a consistent source of resilience all year, and last month's report came in far stronger than expected. A strong number again would ease any recession fears but would reinforce the Fed's lean toward holding rates high or even hiking. A weak number would be the first real crack in the economy's armor and would shift the conversation quickly.
The minutes from the Fed's June meeting are also due and will be closely read. After the central bank's hawkish surprise earlier this month, investors want a clearer sense of just how committed policymakers are to potential rate hikes, and how divided the committee really is. Consumer confidence data on Tuesday and the ISM manufacturing reading on Wednesday round out a busy stretch ahead of the holiday.
Oil and the Iran ceasefire remain the most important things to watch underneath the data. With crude back at pre-war levels, continued de-escalation would cement the disinflation story and could eventually take Fed rate hikes off the table. But Friday's accusations of ceasefire violations are a reminder of how quickly that can reverse. If the truce frays and oil spikes again, the entire improving inflation picture is at risk.
Finally, keep an eye on whether the tech selloff stabilizes or deepens. If the rotation out of AI names continues in an orderly way and the rest of the market picks up the slack, that is healthy. If it turns into a broader risk-off move, it could pressure the indexes given how much they lean on a few large tech stocks.
The bottom line heading into next week: oil is low, inflation is likely peaking, and the labor market gets its big test on Thursday. The macro setup is improving, but the AI trade is shaky and the Iran ceasefire is fragile.
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