Inflation and Behind Last Friday’s Sell-Off: A Story of Crowding and Capital Needs

Good Morning Ladies and Gentlemen

“Some people drink from the fountain of knowledge; others just gargle.”

Robert N. Anthony

What We Can Learn From Last Friday

Last Friday, a notable sell-off transpired across diverse asset classes, encompassing bonds, equities, cryptocurrencies, and commodities. This intermarket activity should not be interpreted as indicative of a new trend but rather as a transient phenomenon driven by specific market dynamics. Primarily, the sell-off can be ascribed to the excessively optimistic positioning of global fund managers, who have shown a marked preference for equities and commodities in recent times. Additionally, there has been a temporary surge in investors’ capital requirements. Compounding this situation is the forthcoming SpaceX initial public offering (IPO), anticipated today, which is attracting significant capital inflows, alongside Alphabet’s substantial capital raise totalling US$85 billion. Furthermore, Meta Platforms has signalled potential capital requirements comparable to Alphabet’s. Should the market experience a capital exigency of up to US$250 billion within a compressed timeframe, the resultant urgency to liquidate existing positions is expected to escalate considerably. Notably, the price of crude oil declined by 3%; however, this downturn was not attributed to prevailing economic concerns. Typically, such movements would trigger a buying sentiment in the stock market. In stark contrast, AI-related shares, which had previously experienced significant gains, declined sharply, contributing to substantial losses in major indices, including the S&P 500, S&P 100, and Nasdaq 100. Specifically, the SOX semiconductor index registered a 10% loss, with hard drive manufacturers declining 12%, hardware 9%, and network indices 6%. Commodity shares also faced severe losses, as evidenced by the XAU mining index, which fell just under 9%, and oil service shares, which fell just under 5%. Despite the severity of these losses, I have the impression that the circumstances did not quite fit a traditional “sell-off” day.

Annual Inflation

In May, the annual inflation rate in the United States surged to a three-year high of 4.2%, largely driven by fallout from the conflict in Iran, underscoring the significant impact of rising energy prices on the domestic economy. Recent data from the Bureau of Labour Statistics further illustrates the intricate relationship between energy costs and overall economic stability. While the Consumer Price Index (CPI) has risen sharply, core inflation measures have increased more slowly than expected. Notably, the peak inflation rate was 9.1% in June 2022, and despite the recent uptick, we are still far from that level. It is quite plausible that the May inflation rate may represent a peak; however, for this to hold true, conditions in the Strait of Hormuz would need to improve. If they do not, we could see a continued month-on-month increase in inflation, with rates starting in the 5% range becoming a real possibility.

U.S. Interest Rates

Last Friday, the monthly labour market report revealed a significantly stronger performance than analysts had anticipated, with the addition of 172,000 new jobs. This positive development has heightened investors’ expectations regarding potential interest rate increases. However, the GDPNow estimate for the second quarter of 2026 has been revised downward to 3.0%, a decrease from last week’s projection of 3.8%. Although there has been a slight deceleration in recent weeks, US economic growth continues to exceed average levels. Futures traders are currently predicting a significant interest rate hike in December 2026, which is expected to occur sooner than previously thought and likely to follow the US mid-term elections. At present, the key interest rate in the United States is maintained within a range of 3.5% to 3.75%. The next Federal Reserve meeting is scheduled for June 17. With over 90% probability, the key interest rate will remain unchanged, although the latest inflation figures, released on Wednesday as noted above, would, in principle, already justify a rate increase.

European Interest Rates

As expected, the Governing Council of the ECB raised key interest rates by 0.25 percentage points yesterday. The European Central Bank (ECB) aims to convey its commitment to addressing rising inflation. It appears to be operating with less political influence than its American counterparts and is taking the necessary measures accordingly. One-month euro futures indicate that the market expects the ECB to raise rates by 25 basis points once more by the end of 2026. Since the meeting on June 5, 2025, the deposit rate has remained stable at 2.0%. The impact of yesterday’s interest rate increase on long-term rates is likely to be minimal, as this adjustment has already been factored into the market. Moreover, monetary policy tends to influence the economy more through long-term financing conditions than through short-term interest rates themselves. It is unlikely that these conditions will tighten to the point of hampering the performance of the European economy. Additionally, the euro has remained stable against the dollar recently.

Ladies and Gentlemen

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I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

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