AI trading cools down as inflation returns! US stocks face a double risk squeeze.

Market participants point out that the escalation of the situation in the Middle East has pushed up oil prices, leading to the return of inflation risks driven by energy to the market, and rapidly increasing expectations of a rate hike by the Federal Reserve. As artificial intelligence (AI) trading cools off recently, key inflation data such as the US Consumer Price Index (CPI) and earnings reports season will become the focus of the market this week, with the results directly affecting the policy path of the Federal Reserve and the global stock market. Analyst Damir Tokic said that the market is currently dominated by two main themes - inflation and the AI bubble, both of which are exerting significant pressure on the stock market. He added that these two themes will continue to dominate the market, especially against the backdrop of the upcoming release of the US Consumer Price Index (CPI) data and the earnings season. The analyst also pointed out that AI trading is facing setbacks in the Asian market, dragging down the US semiconductor sector. He believes that this trend "fits the characteristics of the gradual deflation of the AI bubble." Tokic said, "With the escalation of the situation in the Middle East, the market has already started to factor in the Federal Reserve raising interest rates in September, and it is expected to raise rates twice by May 2027." "The inflation shock risk triggered by the rise in energy prices has re-entered the market's view." Although futures traders and forecasters generally expect the Federal Reserve to stay put at the July meeting, the likelihood of the central bank taking action at that time is increasing. On Monday, bets on a Federal Reserve rate hike continued to rise. According to CME Group's "FedWatch" tool, the market currently expects a 46.5% probability of the Federal Reserve raising interest rates by 25 basis points on July 29, higher than 34% last Sunday. On the prediction market platform Kalshi, traders currently estimate a 36% probability of a Federal Reserve rate hike, higher than the level of less than 20% last Sunday and much higher than the probability of less than 10% earlier this month. The increasing market expectations of a Federal Reserve rate hike come as US President Trump announces the reimplementation of sanctions against Iranian ports near the Strait of Hormuz and imposes a 20% transit fee on all goods shipped through the strait. With the recent tensions between the US and Iran resurfacing, international oil prices have risen again, exacerbating concerns about inflation remaining elevated for longer and forcing the Federal Reserve to raise interest rates. Therefore, investors will closely monitor key inflation data such as the US June Consumer Price Index (CPI) and Wholesale Price Index, which are due to be released soon. This will be the last batch of inflation data released before the Federal Reserve convenes its monetary policy meeting later this month, providing important clues about future interest rate prospects. Economists expect that the overall CPI and core CPI, which excludes food and energy prices, are expected to show a slight slowdown in the year-over-year increase in June compared to May - with the US June CPI expected to rise by 3.8% year-on-year, lower than the 4.2% year-on-year increase in May - but both indicators are still significantly above the Federal Reserve's 2% inflation target. With the tensions between the US and Iran escalating again and oil prices continuing to rise, the inflation outlook may become more complex. Neil Dutta, director of economic research at Renaissance Macro, a macroeconomic and financial market research institution, further emphasized concerns in the market about the possibility of the Federal Reserve taking action. Dutta said, "The US economy is currently closer to the Federal Reserve's goals for economic growth and employment than it is to its inflation target. Therefore, based on recent changes in the language of the Federal Open Market Committee (FOMC), I believe that the threshold for the Federal Reserve to raise rates again is relatively low." Mark-Andre Fongern, Director and Senior Portfolio Manager at Moelis & Company, also warned that geopolitical conflicts could have a cascading effect on the credit markets. Fongern said, "Simply put, the longer it takes for global oil transportation and the Strait of Hormuz to return to normal, the higher the probability of further rate hikes by the Federal Reserve, and therefore the greater the likelihood of increased pressure on the private credit market." He concluded by warning, "We are walking on thin ice right now!"