Market Brief: Markets Rally Into the Open, Supported By AI Outlook and Weaker Inflation

Optimism is rippling across the financial markets and US equity futures are setting up for another strong open after Oracle Corp. said its contract backlog exploded by a staggering 359 percent to $455 billion in its first quarter, underscoring the sheer scale of the ongoing buildout of artificial intelligence infrastructure. By our estimates, the top ten AI-focused companies listed on US exchanges have collectively invested approximately $383 billion in capital expenditures over the past four quarters—equivalent to nearly 1.3 percent of gross domestic product—and are poised to commit at least another $475 billion over the coming year, providing a powerful counterbalance to signs of softness emerging elsewhere in the economy.

The dollar is retreating after US wholesale prices tumbled unexpectedly in August, helping clear the way for more easing from the Federal Reserve. The producer price index for final demand—which measures changes in the prices of goods and services produced in the US—fell -0.1 percent last month after a revised 0.7 rise in July, the Bureau of Labor Statistics said this morning, well below the consensus forecast. In the 12 months through August, the index advanced 2.6 percent after rising 3.1 percent in July. There were some worrisome caveats however: components that feed into the Fed's preferred measure of inflation—the personal consumption expenditures index—printed at elevated levels, led by portfolio management fees, and margins at wholesalers and retailers fell 1.7 percent, pointing to a softening in underlying demand.

Expectations for the Fed’s policy trajectory were little changed in the face of yesterday’s revisions from the Bureau of Labor Statistics, which suggested that job growth was already slowing before Donald Trump began raising tariffs this spring. According to the latest set of benchmark revisions, the economy added 911,000 fewer jobs in the 12 months ended in March than initially estimated, exceeding the consensus forecast for a 700,000-position cut. If the final estimate matches the preliminary adjustment*, it would bring the average pace of seasonally adjusted employment gains from 147,000 jobs a month over the period down to 70,000.

Treasury yields briefly popped higher when a federal judge blocked President Trump’s attempted firing of Fed Governor Lisa Cook, but the move soon reversed as investors downplayed the implications for monetary policy. In her ruling, Judge Jia Cobb said “The Court finds that permissible cause for removal of a Federal Reserve Governor extends only to concerns about the Board member’s ability to effectively and faithfully execute their statutory duties, in light of events that have occurred while they are in office”. The administration’s mortgage fraud allegations aren’t considered sufficient cause under the Federal Reserve Act, given that “removal was not meant to be based on the President’s assumptions about the official’s future performance as extrapolated from unproven conduct dating from before they assumed the office”. The Justice Department is likely to launch an appeal, but the ruling should allow Cook to attend next week’s policy meeting, at which she is expected to join a majority of her colleagues in voting for this year’s first rate cut.

The European Central Bank is widely expected to keep its policy rates and guidance unchanged in tomorrow’s decision, meaning that moves in the euro-dollar pair are far more likely to come in the aftermath of the US consumer inflation report. August’s consumer price update is unlikely to dislodge market confidence in a rate cut at next week’s Fed meeting, but a print well above—or below—forecasts could impact pricing further out on the curve. At the moment, traders have almost three moves priced in for the remainder of the year, with another three seen coming in 2026, but this is vulnerable to change.

*History would suggest that this is unlikely.

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