Fed Wary of Rate Hikes Despite In-Line CPI; AI Stocks Stay Strong

He explained that the company has invested $15 billion and is generating annual revenue of $10.5 billion, a level at which the investment could be recovered within a year. This rapid payback was cited as evidence of the high profitability of the AI business.

The core of the AI business comes down to selling services at high prices and building data centers quickly. If services can be offered at high prices, the cost of building data centers can be recovered faster, so construction speed becomes critical. This is a decisive factor in securing a competitive edge in the AI market.

Analysts say components and labor costs are not very important in building AI data centers. Because the investment can be recovered within a year, the key is how quickly data centers can be built rather than cutting costs. As a result, the AI data center market is taking on the character of a race for speed.

The consumer price index (CPI) came in at the expected level, but the market showed a mixed reaction. The Dow Jones slipped slightly, while the S&P 500 rose 0.26% and the Nasdaq rose 0.54%. The larger gain in the Nasdaq is attributed to strength in AI-related tech stocks.

This joint rally appears to stem from the market's conviction that AI data center business still maintains high profitability. Continued demand for AI data centers is having a positive effect on chip-related companies.

The 2-year and 1-year short-term yields fell only 2bp and 2.5bp, respectively, and the 10-year did not fall even 1bp. The 30-year yield, by contrast, rose 6bp, reflecting market uncertainty.

This means Treasury prices fell and yields rose, indicating investors had to demand higher yields to sell the bonds. This rise in yields is acting as a powerful 'gravity' on the market.

The current rate level signals that it is acting as a very strong gravitational force on the market. High rates can dampen investor sentiment and weigh on the broader economy. With the producer price index (PPI) release and a 30-year Treasury auction scheduled for the next day, market attention is expected to focus there.

Chicago Fed President Austan Goolsbee warned that rate cuts could boost demand, overheat the economy, and trigger inflation. He said the biggest problem facing the US economy now is rising prices, and the Fed's goal is to bring the inflation rate down to 2% a year. Goolsbee pointed out that stock gains driven by AI expectations and wealth effects could pull consumption and investment forward, overheating the economy and raising inflation in the short term. He stressed that the stock market does not represent the whole economy and that the Fed's legal mandate does not include satisfying the stock market, reaffirming the Fed's firm commitment to price stability.

Boston Fed President Susan Collins said she is ready to raise the policy rate if economic conditions call for tighter policy. She noted she would support a rate hike as early as the September FOMC meeting if economic indicators require it. She added that this is not a firm endorsement at present but a conditional stance dependent on future inflation and employment data.

In conversations with local businesses, she said price concerns are constantly raised, and businesses and households in her district are under strain from persistent price increases. She stressed the severity of inflation, noting that more and more people in low- and middle-income brackets say they are struggling to make ends meet.

It was pointed out that high rates are acting as a 'very heavy gravity' on the market and that this situation must be recognized. This draws attention to the possibility that the high-rate stance could persist even if a hold is confirmed.

In particular, daily customs export figures, credit card spending, and the growth and inflation path to be presented in the Bank of Korea's revised economic outlook on August 27 were cited as key benchmarks.

This suggests the Fed is willing to maintain sufficiently tight policy to achieve its inflation goal.

Rising rates increase borrowing costs and can weigh on investment returns, so financial positions need careful consideration.

This is seen as reflecting market expectations for the high profitability of AI data center business.

SMCI provides core infrastructure for AI data centers, and as the AI market grows and earnings expectations rise, it is drawing investor interest.

Such deregulation could have a positive effect on expanded investment by related companies and on market growth.

The market's mood was likened to the early stage of a party, when 'the party has fully started, the music is playing, and people are dancing and happy.' This suggests the AI data center market is still in an early growth phase and that active investment will continue for a considerable time.

Data center construction is slated to proceed actively through 2027, and beyond simply erecting buildings, filling them with server racks and countless chips is essential. Without chips, a data center is just an empty warehouse, so chip demand is bound to concentrate in facilities equipped with power and cooling systems. Accordingly, analysts said the semiconductor industry is set for an unprecedented boom.