Weekly Letter (7/13 - 7/17)
The main drivers in the market this week were the two inflation reports from the Bureau of Labor Statistics: CPI and PPI, geopolitics in the middle east, and a tech/ AI sell off triggered by both overproduction/low demand speculation and the release of a new competitive Chinese AI model.
Equities finished the week on a net low with the S&P 500 down -1.6%, the Nasdaq down -2.9%, and the Dow down -0.9%. The S&P and Nasdaq were primarily driven by the tech/AI selloff from worried investors and a release of a Chinese AI model that rivals top American models from Anthropic and OpenAI. Many investors are questioning whether AI chip makers are producing more chips than the reality of future demand, despite strong earnings from TSMC– a main chip producer for NVIDIA, Apple, AMD, and Broadcom– that smash the estimated earnings by almost 12%. The other side of the selloff this week came from the release of the Kimi K3 AI model that directly rivals the top AI models out of the US creating another “deepseek AI moment” that rocked equities in the same way last year.
Inflation data early in the week and geopolitics dominated yields, USD, Oil, and Gold. The Bureau of Labor statistics delivered inflation data for both consumers (CPI) and producers (PPI) this week reflecting the inflation data from the month of June. Both headline and core CPI came out lower than the consensus expectation with headline CPI MoM coming in 0.2% below expected and core CPI at 0.2% below expected. PPI releases also came in lower than expected with headline PPI MoM coming in 0.3% lower than expected and core PPI MoM reporting 0.1% below expected. The easing of inflation during the month of June was primarily caused by the ceasefire between the US and Iran allowing for an increased flow of Oil through the Strait of Hormuz that lowered oil prices and the pass-on effect that the price of oil has on other goods. The inflation data for the month of June did not however take the recent developments in the middle east into account where the US and Iran have renewed strikes once again that have closed the strait and stopped the flow of oil once more.
Yields were down this week overall, with strong responses to the inflation news early in the week as investors rushed to buy bonds to lock in higher returns as the possibility for the fed hiking rates diminished with the favorable inflation news. Yields creeped back up however towards the end of the week as tensions rose in the middle east and news came out of new strikes between the US and Iran in the Strait of Hormuz. The 2 year yield was down 3 basis points ending at 4.18% and the 10 year yield was down 1 basis point closing at 4.55%. The 10s2s spread widened by 2 basis points.
Gold this week responded positively to the inflation data delivered by the Bureau of Labor Statistics but came down for the week overall as conflict renewed in the middle causing more speculation of rate hikes for the coming year as seen in yields; Gold was down a total of 2.2%.
The dollar this week ended relatively flat with a loss of -0.16% on the week. The Dollar responded right away and took a tumble in response to the inflation report, as the data for the month of June looked to be promising for lower rates that make for less foreign investment in US treasuries, hurting the dollar. The dollar climbed back up later in the week as tensions rose in the middle east with possibilities of the conflict expanding once again which will keep oil prices high along with inflation caused by the oil shock.
Oil prices climbed 14% reaching $86 a barrel this week. This price jump was in response to increased tensions and military strikes between the US and Iran where multiple oil tankers in the Strait have been hit.
