The spike in oil prices had only a short-lived impact on global investor appetite. AI optimism fuelled the indices higher, chipmakers were the biggest winners, Big Tech stagnated on fears that massive and increasingly leveraged AI spending wouldn't generate satisfactory returns on investment, while software companies swung between fears that AI would kill their business and hopes that increasingly expensive AI tokens wouldn't fully replace humans and existing services.

Today, 3.5 years after ChatGPT entered our everyday lives, many agree that AI significantly increases productivity and will be deflationary over the medium to long term. In the short run, however, this transition is costing many people their jobs.

In the US, the latest labour market data has been less catastrophic than the layoff headlines suggested, perhaps due to job creation linked to the massive AI buildout and the temporary tailwind from the World Cup. Released yesterday, the data showed that US job openings were slightly higher in April, but hiring remained slow. The data also hinted at some improvement in consumer sentiment and expectations, thanks to hopes surrounding a potential peace deal between the US and Iran.

The good news is that US crude is consolidating below $70pb this morning, keeping inflation expectations in check as the new Federal Reserve (Fed) Chair, Kevin Warsh, prepares to speak at the central bankers' meeting in Sintra, Portugal.

All eyes on Warsh

Warsh’s arrival marked a clear and important restatement of the Fed's policy priorities: price stability. Today, he is expected to emphasize the importance of price stability, as US labour market data point to a slowing—but not alarmingly weakening—economy. This will likely continue to push the short end of the US yield curve higher and could lead to a flatter curve, with softer pressure on longer-dated yields, as tighter monetary policy today should help ease longer-term inflation expectations.

How rising yields will impact US indices remains to be seen. Earnings expectations appear strong enough for investors to absorb higher yields, especially if inflation expectations continue to ease alongside lower energy prices.

Today, the ADP report is expected to show 118K new private-sector jobs in June, while tomorrow's NFP report could print a similar figure, with relatively steady wage growth. Figures in line with expectations would reassure investors that the labour market remains steady and under control.

Globally...

Inflation outlook is improving. The pullback in oil prices should be reflected in next month's inflation numbers, as the oil shock was not long enough to ripple through the broader economy. Earlier this week, we already saw some easing in the euro area's preliminary June inflation figures, and today's aggregate CPI release should confirm a decline in headline inflation to 3.0% from 3.2% a month earlier.

European policymakers continue to warn that the energy crisis is not over and that inflation above the 2% target must be handled carefully. In practical terms, the European Central Bank (ECB) is expected to raise interest rates one more time this year.

But growth in the euro area was already anaemic before the Iran war, and the outlook has deteriorated since then, with first-quarter GDP data turning negative. Therefore, if inflation continues to show signs of easing, the ECB will struggle to justify inflicting further rate pain on already fragile economies.

As such, the EURUSD upside attempts against a broadly stronger US dollar remain easily countered by hawkish Fed expectations and the resilience of the US economy, which—unlike the euro area's contraction—posted 2% growth in the first quarter. The dollar's strength is expected to build further in the coming months—marking an important shift from the early-year de-dollarization and currency debasement trade.

That said, there were many factors behind that debasement trade following Donald Trump's return to the White House, including rising US debt, an unsustainable fiscal policy, trade tensions with major—if not all—trading partners, and the geopolitical pressure the US has been exerting on both historic rivals and long-standing allies. None of those factors has changed. The only thing that has changed is the Fed's policy outlook.

So I believe the US dollar will appreciate on the back of rising yields, but the long-term de-dollarization trend will not disappear. That should result in a slower-than-otherwise appreciation of the US dollar, while limiting the negative impact on US equities and easing inflationary pressure outside the United States.

Outlook: bullish

What is clear is that it has become increasingly difficult to turn bearish on financial markets while the bullish tide remains so strong. We have barely seen any durable pullbacks over the past few years, thanks to AI and abundant liquidity. And neither of those drivers looks ready to disappear. As liquidity continues to flow, it has to find a home. You can call it stock price inflation, or you can attribute it to strong earnings growth and even stronger expectations—but the market's direction remains tilted to the upside (though a 10-15% correction in tech heavy indices would be healthy!)

So the best course of action is to stay invested, diversify, and benefit from valuation gaps. There will be corrections along the way, and tech-related volatility is high enough to generate impressive swings. Thin summer trading could amplify market reactions to news, but the overall outlook remains bullish for the month ahead.