The inflation print was the excuse the market had been waiting for.
The real story played out inside the AI complex, where money flooded back into anything that plugs into a rack, and out of almost anything that runs on top of it. Underneath all of that, the US Treasury quietly reminded everyone that funding the government is getting more expensive by the auction, a slow-motion problem that will not stay quiet forever.
The Rundown
- July inflation cooled for a second straight month, easing the pressure on the Fed and giving risk assets a green light.
- AI hardware, chips, optical suppliers and the neocloud crowd staged a broad-based rally on the back of blowout earnings.
- Enterprise software took a sharp rotational hit as capital chased the "picks and shovels" trade instead.
- The Treasury cleared 10-year debt at the highest yield since 2007, a quiet but consequential signal about fiscal risk.
The Inflation Print Was Benign, But It Wasn't the Driver
Headline CPI eased from 3.5 to 3.4 percent in July, with core inflation sliding to 2.5 percent, the lowest since March 2021.
Both matched consensus, which is exactly why the market treated it as background music. Month-on-month, the index rose just 0.1 percent (0.2 percent ex-food-and-energy). Gasoline is still up almost 25 percent year-over-year thanks to the Iran-linked energy shock, but the second derivative is now clearly bending in the right direction.
The immediate consequence is that fed funds futures now put the odds of a September hike at 40 percent, down from 48 percent the day before. A hike before year-end is still the base case for most desks, but the market has quietly stopped panicking about it. Add in last Friday's surprise drop of 23,000 nonfarm jobs and you have a Fed with plenty of cover to sit on its hands into Jackson Hole later this month.
One data curiosity worth flagging: software and related products are up 21.2 percent year-over-year in the CPI basket, a genuinely unusual print. Apple already telegraphed hardware price hikes on Macs and iPads back in June, and the software side of the pricing story is now doing the heavy lifting. Ironic, given how the equity market treated software names on Wednesday.
AI Hardware Gets Its Groove Back
If the CPI was the permission slip, SUPER MICRO COMPUTER INC (SMCI | ???19.02%) was the accelerant.
The AI-server maker crushed expectations and dragged the entire hardware supply chain along with it. MICRON TECHNOLOGY INC (MU | ???4.92%) rallied on the same tailwind, and MARVELL TECHNOLOGY INC (MRVL | ???2.25%) finally caught a bid after weeks of grinding lower.
NVIDIA CORP (NVDA | ???3.03%) added a clean three percent, modest by its own standards, but meaningful on a day when the S&P was essentially flat.
The most eye-catching moves came from the neoclouds, the pure-play AI compute leasing crowd.
NEBIUS GROUP NV (NBIS | ???34.14%) surged 34 percent after a smaller-than-feared quarterly loss and revenue that topped expectations. COREWEAVE INC-CL A (CRWV | ???19.28%) added another 19 percent on top of Tuesday's after-hours pop.
And the optical networking suppliers that quietly move all that AI traffic between racks - LUMENTUM HOLDINGS INC (LITE | ???13.63%) and COHERENT CORP (COHR | ???8.24%) - went along for the ride.
When the market decides the AI capex cycle is alive, it does not do it politely.
Software Wears the Rotation
The flip side of any strong rotation is that somebody has to fund it, and on Wednesday it was software.
MICROSOFT CORP (MSFT | ???2.26%) - a name I hold and have been long since February - took one of the sharper hits in the S&P 500, alongside PALANTIR TECHNOLOGIES INC-A (PLTR | ???2.23%), SALESFORCE INC (CRM | ???2.10%) and SERVICENOW INC (NOW | ???2.04%).
The trigger is not new: the deeper the market believes in the AI transformation, the more it worries that coding-heavy SaaS workloads get automated away or margin-compressed by AI-native competitors.
I would keep this in perspective. Palantir and Microsoft are still up 35 and 24 percent year-to-date respectively, precisely because earlier this year the market was fretting about chip overvaluation and running the other way.
These rotations flip fast and they flip often. My own MSFT thesis is still built around cloud infrastructure and enterprise stickiness, a one-session hit driven by a hardware-led rotation does not change that, though it is a reminder that even the mega-caps are not immune to sentiment swings. META PLATFORMS INC-CLASS A (META | ???3.38%) also gave back a decent chunk on the day, which fits the same pattern.
Away from the AI axis, CAVA GROUP INC (CAVA | ???14.24%) had its own moment after a Q2 that showed traffic and profitability heading in the right direction, always encouraging in a consumer environment where affordability is a live conversation.
The Treasury Auction Nobody Talked About
The bond market delivered the day's most interesting quiet signal.
The Treasury sold $42 billion in 10-year notes at 4.683 percent, the highest yield on a 10-year auction since 2007. That is not a panic level, but it is a clear message from long-duration buyers: we want more compensation for the risk of holding US paper. The two components of that risk are well known but worth repeating.
First, the Fed has missed its 2 percent inflation target for five years running, which eats real returns on long bonds. Second, US fiscal discipline has effectively evaporated on both sides of the aisle.
The numbers are stark. Public debt is closing in on $32 trillion, over 100 percent of GDP. Total federal debt is nudging $40 trillion. Interest expense over the first ten months of the fiscal year hit $931 billion, almost matching Medicare ($955 billion) and comfortably above defense spending ($804 billion).
For the full year, Treasury expects roughly $1.3 trillion in interest costs. That is a compounding problem, and it is one of the reasons new Fed Chair Kevin Warsh's Jackson Hole address at the end of this month is going to matter more than usual. His early communication has been described charitably as "messy," and he needs to project credibility as an inflation fighter to keep the long end anchored.
Treasury Secretary Scott Bessent has been intervening to support the yen - an indirect play to stop Japan from having to dump US Treasuries - but that is a finger-in-the-dike solution to a structural leak.
SpaceX Rewrites Its Own Narrative
SPACE EXPLORATION TECHN-CL A (SPCX | ???9.65%) had the standout single-name story of the day, rebounding 9.7 percent to $146 after leaked details from an internal all-hands meeting made their way to investors.
Elon Musk laid out a 10-gigawatt AI compute target for the end of 2027, roughly a tenfold expansion of current capacity, and by his math around 20 percent of total US AI compute. He also disclosed that Starlink now has 22 million mobile users, up from 9 million at the start of the year, largely thanks to partnerships with existing telecom operators to cover coverage gaps.
Starlink pulled in $4.29 billion in Q2 revenue, roughly 70 percent of the company's total.
The pivot toward AI infrastructure is not without cost, the AI and Starship divisions posted operating losses in the quarter as capex ramped hard. But the tape reaction says the market prefers a big, coherent story to a slow drift.
The next test comes on August 20, when another tranche of insider shares is released from lockup. If the stock absorbs that supply without breaking, the sub-$135 IPO-price scare of the past few weeks starts to look like the bottom of this cycle.
Cisco Adds an After-Hours Cherry
After the close, CISCO SYSTEMS INC (CSCO | ???2.86%) delivered its own AI-adjacent beat. Adjusted EPS of $1.22 on $17.3 billion in revenue for the July-ending quarter, against consensus of $1.17 and $16.8 billion.
CEO Chuck Robbins leaned into the same message we heard from Super Micro earlier in the week, Cisco is well positioned to help customers deploy AI wherever they choose to run it. The 2.5 percent after-hours move is modest, but it fits the day's pattern: anything that carries AI infrastructure water is getting rewarded.
Conclusion
Wednesday was not really about the CPI. It was about capital rotating hard back into AI hardware and out of AI software, with a benign inflation print providing the cover.
Super Micro reignited the entire hardware complex, the neoclouds and optical suppliers piggybacked, and enterprise software took the funding hit. Underneath the equity noise, the Treasury quietly reminded us that fiscal reality is not going away, and Jackson Hole later this month is now the next real inflection point.
I would not overreact to a single session of rotation; both sides of this trade have flipped before and will flip again. But the direction of travel on the long end of the curve is the story I am watching most closely into the back half of August.
ChartMill Market Desk - Kristoff
With regard to the stocks discussed in the article above; the author owns individual shares in Nvidia & Microsoft.
This daily update is prepared by ChartMill for informational purposes only and does not constitute investment advice. Always do your own due diligence before making investment decisions.
Read full article here »
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Cool CPI Lights the Fuse Under AI Hardware as Software Takes a Beating
The inflation print was the excuse the market had been waiting for.
The real story played out inside the AI complex, where money flooded back into anything that plugs into a rack, and out of almost anything that runs on top of it. Underneath all of that, the US Treasury quietly reminded everyone that funding the government is getting more expensive by the auction, a slow-motion problem that will not stay quiet forever.
The Rundown
The Inflation Print Was Benign, But It Wasn't the Driver
Headline CPI eased from 3.5 to 3.4 percent in July, with core inflation sliding to 2.5 percent, the lowest since March 2021.
Both matched consensus, which is exactly why the market treated it as background music. Month-on-month, the index rose just 0.1 percent (0.2 percent ex-food-and-energy). Gasoline is still up almost 25 percent year-over-year thanks to the Iran-linked energy shock, but the second derivative is now clearly bending in the right direction.
The immediate consequence is that fed funds futures now put the odds of a September hike at 40 percent, down from 48 percent the day before. A hike before year-end is still the base case for most desks, but the market has quietly stopped panicking about it. Add in last Friday's surprise drop of 23,000 nonfarm jobs and you have a Fed with plenty of cover to sit on its hands into Jackson Hole later this month.
One data curiosity worth flagging: software and related products are up 21.2 percent year-over-year in the CPI basket, a genuinely unusual print. Apple already telegraphed hardware price hikes on Macs and iPads back in June, and the software side of the pricing story is now doing the heavy lifting. Ironic, given how the equity market treated software names on Wednesday.
AI Hardware Gets Its Groove Back
If the CPI was the permission slip, SUPER MICRO COMPUTER INC (SMCI | ???19.02%) was the accelerant.
The AI-server maker crushed expectations and dragged the entire hardware supply chain along with it. MICRON TECHNOLOGY INC (MU | ???4.92%) rallied on the same tailwind, and MARVELL TECHNOLOGY INC (MRVL | ???2.25%) finally caught a bid after weeks of grinding lower.
NVIDIA CORP (NVDA | ???3.03%) added a clean three percent, modest by its own standards, but meaningful on a day when the S&P was essentially flat.
The most eye-catching moves came from the neoclouds, the pure-play AI compute leasing crowd.
NEBIUS GROUP NV (NBIS | ???34.14%) surged 34 percent after a smaller-than-feared quarterly loss and revenue that topped expectations. COREWEAVE INC-CL A (CRWV | ???19.28%) added another 19 percent on top of Tuesday's after-hours pop.
And the optical networking suppliers that quietly move all that AI traffic between racks - LUMENTUM HOLDINGS INC (LITE | ???13.63%) and COHERENT CORP (COHR | ???8.24%) - went along for the ride.
When the market decides the AI capex cycle is alive, it does not do it politely.
Software Wears the Rotation
The flip side of any strong rotation is that somebody has to fund it, and on Wednesday it was software.
MICROSOFT CORP (MSFT | ???2.26%) - a name I hold and have been long since February - took one of the sharper hits in the S&P 500, alongside PALANTIR TECHNOLOGIES INC-A (PLTR | ???2.23%), SALESFORCE INC (CRM | ???2.10%) and SERVICENOW INC (NOW | ???2.04%).
The trigger is not new: the deeper the market believes in the AI transformation, the more it worries that coding-heavy SaaS workloads get automated away or margin-compressed by AI-native competitors.
I would keep this in perspective. Palantir and Microsoft are still up 35 and 24 percent year-to-date respectively, precisely because earlier this year the market was fretting about chip overvaluation and running the other way.
These rotations flip fast and they flip often. My own MSFT thesis is still built around cloud infrastructure and enterprise stickiness, a one-session hit driven by a hardware-led rotation does not change that, though it is a reminder that even the mega-caps are not immune to sentiment swings. META PLATFORMS INC-CLASS A (META | ???3.38%) also gave back a decent chunk on the day, which fits the same pattern.
Away from the AI axis, CAVA GROUP INC (CAVA | ???14.24%) had its own moment after a Q2 that showed traffic and profitability heading in the right direction, always encouraging in a consumer environment where affordability is a live conversation.
The Treasury Auction Nobody Talked About
The bond market delivered the day's most interesting quiet signal.
The Treasury sold $42 billion in 10-year notes at 4.683 percent, the highest yield on a 10-year auction since 2007. That is not a panic level, but it is a clear message from long-duration buyers: we want more compensation for the risk of holding US paper. The two components of that risk are well known but worth repeating.
First, the Fed has missed its 2 percent inflation target for five years running, which eats real returns on long bonds. Second, US fiscal discipline has effectively evaporated on both sides of the aisle.
The numbers are stark. Public debt is closing in on $32 trillion, over 100 percent of GDP. Total federal debt is nudging $40 trillion. Interest expense over the first ten months of the fiscal year hit $931 billion, almost matching Medicare ($955 billion) and comfortably above defense spending ($804 billion).
For the full year, Treasury expects roughly $1.3 trillion in interest costs. That is a compounding problem, and it is one of the reasons new Fed Chair Kevin Warsh's Jackson Hole address at the end of this month is going to matter more than usual. His early communication has been described charitably as "messy," and he needs to project credibility as an inflation fighter to keep the long end anchored.
Treasury Secretary Scott Bessent has been intervening to support the yen - an indirect play to stop Japan from having to dump US Treasuries - but that is a finger-in-the-dike solution to a structural leak.
SpaceX Rewrites Its Own Narrative
SPACE EXPLORATION TECHN-CL A (SPCX | ???9.65%) had the standout single-name story of the day, rebounding 9.7 percent to $146 after leaked details from an internal all-hands meeting made their way to investors.
Elon Musk laid out a 10-gigawatt AI compute target for the end of 2027, roughly a tenfold expansion of current capacity, and by his math around 20 percent of total US AI compute. He also disclosed that Starlink now has 22 million mobile users, up from 9 million at the start of the year, largely thanks to partnerships with existing telecom operators to cover coverage gaps.
Starlink pulled in $4.29 billion in Q2 revenue, roughly 70 percent of the company's total.
The pivot toward AI infrastructure is not without cost, the AI and Starship divisions posted operating losses in the quarter as capex ramped hard. But the tape reaction says the market prefers a big, coherent story to a slow drift.
The next test comes on August 20, when another tranche of insider shares is released from lockup. If the stock absorbs that supply without breaking, the sub-$135 IPO-price scare of the past few weeks starts to look like the bottom of this cycle.
Cisco Adds an After-Hours Cherry
After the close, CISCO SYSTEMS INC (CSCO | ???2.86%) delivered its own AI-adjacent beat. Adjusted EPS of $1.22 on $17.3 billion in revenue for the July-ending quarter, against consensus of $1.17 and $16.8 billion.
CEO Chuck Robbins leaned into the same message we heard from Super Micro earlier in the week, Cisco is well positioned to help customers deploy AI wherever they choose to run it. The 2.5 percent after-hours move is modest, but it fits the day's pattern: anything that carries AI infrastructure water is getting rewarded.
Conclusion
Wednesday was not really about the CPI. It was about capital rotating hard back into AI hardware and out of AI software, with a benign inflation print providing the cover.
Super Micro reignited the entire hardware complex, the neoclouds and optical suppliers piggybacked, and enterprise software took the funding hit. Underneath the equity noise, the Treasury quietly reminded us that fiscal reality is not going away, and Jackson Hole later this month is now the next real inflection point.
I would not overreact to a single session of rotation; both sides of this trade have flipped before and will flip again. But the direction of travel on the long end of the curve is the story I am watching most closely into the back half of August.
ChartMill Market Desk - Kristoff
With regard to the stocks discussed in the article above; the author owns individual shares in Nvidia & Microsoft.
This daily update is prepared by ChartMill for informational purposes only and does not constitute investment advice. Always do your own due diligence before making investment decisions.
Read full article here »