AI dipped, U.S. inflation spiked, Canada held
What’s causing the market dip?
Last week the cracks showed; this week the floor gave way. The same AI and chip names that powered the run to record equity-market highs became the engine of the drawdown, and S&P 500 technology companies fell by almost 10% over five sessions. The Nasdaq dropped below 25,200 on Wednesday, far off its recent high. As usual, however, it rebounded a little afterwards.
Nothing about the AI story was broken; what changed was positioning. When there are so few companies leading the charge, the way down is as fast as the way up, and a market priced for perfection doesn't need much to swing.
Is U.S. inflation rising?
U.S. inflation hit 4.2% in May, the hottest in three years, and wholesale prices ran hotter still, with headline PPI (the Producer Price Index, which measures the change in U.S. domestic producers’ selling prices) posting its biggest jump in nearly four years. The addition of 172,000 jobs in May added to the picture.
If you strip out energy, core inflation figures were calmer, so this is still mostly an oil story. But the headline is what corners a central bank. Markets now lean toward a U.S. Federal Reserve (the Fed) interest rate hike by year-end, and new Fed chair Kevin Warsh will have to deal with this at his first meeting next week. Higher rates are exactly what an expensive, long-duration market least wants to hear.
Why did the Bank of Canada hold interest rates?
This is where Canada and the U.S. part ways. The Bank of Canada’s (BoC) fifth straight interest rate hold at 2.25% came as no surprise, and all the information in the bank’s statement was built to say nothing. BoC governor Tiff Macklem flagged risk both ways; a rate cut if tariffs bite harder, a rate hike if energy inflation sticks. With other G10 countries leaning towards rate increases, the BoC cutting rates would break from the pack and pressure the loonie, so the neutral tone reads as much like currency management as policy.
The conditions are not neutral: two straight quarters of economic contraction (and three of the last four), and yearly job growth close to a ten-year low. May added back 88,000 jobs, which was welcome but not a trend. And the one real case for a rate increase, the oil spike, has largely faded. With inflation broadly in hand, there is room to cut rates and support economic activity. Our bet: December hike expectations will flip to rate cut expectations. The pressure eased this week, enough to give Tiff Macklem room to breathe.
What’s happening with SpaceX?
The marquee event of the week: SpaceX (Elon Musk’s aerospace and satellite communications company) began trading on the Nasdaq Friday, raising roughly $75 billion at $135 a share, the largest IPO ever (initial public offering, where a private company moves to being publicly traded). Next week brings the first meeting for new Fed Chairman Kevin Warsh; his communication style will be closely followed.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
