Inflation Cooled. IBM Lost $70B.
GOOD MORNING, Tuesday gave markets a cleaner inflation print — and a much messier AI spending signal. June CPI fell 0.4% from May and slowed to 3.5% year over year, pushing the odds of a July Fed hold above 80% and helping the Nasdaq rise 0.9%. But IBM collapsed 25% after warning that customers were redirecting budgets away from software and mainframes toward servers, storage and memory needed for AI infrastructure. Lower inflation helped the market's discount rate. AI capex still created a $70 billion loser. MARKETS | TLDR
INFLATIONThe Fed Finally Got Some Cover to WaitU.S. consumer inflation cooled much more than expected in June. Headline CPI fell 0.4% from May and slowed to 3.5% year over year from 4.2%, while core CPI was flat on the month and rose 2.6% from a year earlier. Economists surveyed by Reuters had expected headline inflation to fall only 0.1% month over month and remain at 3.8% annually. Markets treated the report as a meaningful change in the near-term Fed setup. The probability of no rate change at the July meeting rose to 83.4% from 58.3% the previous day, Treasury yields fell and the dollar weakened. For equities, that matters because a lower expected policy path reduces the discount-rate pressure that had been building around expensive growth stocks. The caveat is timing. Much of June's disinflation came from lower gasoline prices during the earlier U.S.-Iran ceasefire. That backdrop has already changed: oil rose again Tuesday as fighting resumed and the U.S. reimposed a naval blockade around Iran. The June CPI print buys the Fed time. It does not guarantee that July inflation will look as friendly. IBMAI Spending Just Created a Loser on the Other Side of the StackIBM shares plunged about 25% Tuesday after the company warned that second-quarter revenue and profit would miss expectations. CEO Arvind Krishna said customers had shifted late-quarter capital spending toward servers, storage and memory to secure supply-constrained AI infrastructure, causing numerous large IBM deals to slip. That makes IBM's warning more important than a normal company-specific miss. The same AI budget can create a winner in one part of the technology stack and delay revenue in another. Companies racing to build AI capacity are prioritizing chips, networking and data-center hardware first, leaving less room for mainframes, traditional software and other enterprise projects — even when those projects have not been cancelled outright. IBM expects second-quarter revenue of about $17.2 billion, below the roughly $17.86 billion analysts expected, and the stock was on pace to erase around $70 billion of market value. The key question is duration. If this is simply a few quarters of capex reprioritization, IBM can recover as infrastructure bottlenecks ease. If enterprise budgets remain structurally tilted toward AI hardware, the pressure spreads much further across legacy software and IT services. HEADLINES
UPCOMING
DEEP INSIGTHSIBM Warns AI Boom Is Squeezing Software BudgetsRead this for one of the clearest examples yet of AI redistributing, rather than simply increasing, enterprise technology spending. IBM's customers did not suddenly stop investing in technology; they changed the order of what they were willing to fund. That distinction matters for every software, services and hardware company trying to position itself as an AI beneficiary. Wall Street Converges on Higher Risks and RewardsThis is useful context for the bank earnings boom. JPMorgan, Goldman and their peers are earning more from trading, dealmaking and capital-markets activity as IPOs, M&A and AI infrastructure financing accelerate. The upside is record revenue. The risk is that the largest banks are increasingly converging on the same volatile profit engines. |