Peace hopes helped rally, while inflation pushed back
How did the markets respond to Iran conflict news?
This was a short week because of Memorial Day in the U.S. but it wasn’t a quiet one. Markets spent most of the week asking the same question: is the Iran war close to ending, or are we just getting more headline distractions?
The pattern was simple. Peace headlines pushed oil lower and stocks higher. Fresh military headlines pushed oil back up and shook sentiment. Repeat all week.
The key point is that markets still want to look beyond the conflict if they can find even a half-decent excuse. Oil remains volatile, but stocks have been surprisingly resilient. It’s just getting harder to scare investors than it was a few weeks ago.
Is inflation increasing?
The main data release this week was the U.S.’s PCE (Personal Consumption Expenditures, the main inflation gauge used to set monetary policy in the U.S.) for April. It was not exactly good news for the U.S. Federal Reserve (the Fed). Headline inflation rose by 3.8% year over year, the fastest pace in three years, while core PCE (which excludes food and energy costs) rose by 3.3%.
Energy is the obvious culprit; higher oil keeps leaking into the inflation data and makes the Fed’s job much harder. The monthly core inflation number was not a disaster, which helped markets avoid a full panic, but the broader message is clear: inflation is still too high.
Growth didn’t offer much comfort either. U.S. gross domestic product for the first quarter was revised lower than expected, and while consumers are still spending, they have less breathing room. That’s the uncomfortable mix right now: inflation is too high, growth is less impressive, and markets are still near record highs.
For Kevin Warsh, the Fed’s new chair, that is quite the welcome basket. Sticky inflation, volatile oil, strong markets and political pressure to lower interest rates. Challenging, to say the least.
Who’s buying AI stocks?
The AI trade had another big week, but not only because of the usual chip names. Snowflake (a global AI data cloud company with a U.S. headquarters) surged after increasing its performance projections and announcing a major long-term deal with Amazon Web Services.
Once again, the AI trade is spreading. Investors are no longer looking only at hyperscalers (large cloud storage providers) and GPUs (manufacturers of graphics processing units, used to train AI). They’re also rewarding companies working in AI data and infrastructure, as well as companies that can help enterprises actually use AI.
Best Buy added another interesting piece of data. Its performance projections were better than expected, helped by demand for gadgets, gaming, AI glasses and wearables. Consumers are cautious, especially with fuel prices high, but they’re not dead. They’re still spending, just more selectively.
This was the week in one sentence: macroeconomics and political events are getting messier, but corporate stories are still giving investors enough reasons to buy.
What can investors watch out for next week?
Next week, the employment report will matter. Markets need to know whether the labour market is still in “no fire, no hire” mode.
With earnings season mostly behind us, we’re back to watching oil, bond yields and Iran. Peace hopes helped rescue markets this week. Now investors need those hopes to become something more durable.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
