Good morning, investors.

The Fed now looks less likely to hike interest rates than it did 24 hours ago. 

The latest inflation report showed CPI cooled to 3.4% year-over-year in July, as expected, while core inflation fell for a third month in a row to 2.5%.

Stocks rallied after the report and traders raised their bets for no change in interest rates for September to 60%, up from roughly 45% a week ago.

Odds for a rate hike fell to 34% from 40% on prediction markets.

Still, as much as policymakers and economists remain fixated on “higher for longer” rates, investors have largely moved on.

Indeed, the prevailing sentiment across equity markets seems to be more dismissive of macro data than ever. 

Hyperscalers deploying hundreds of billions of capital to build out AI infrastructure does intuitively feel like it would have a greater portfolio impact than incremental, decimal-point changes in economic data.

Wednesday’s trading session provided a compelling snapshot of this reprioritization. The promising inflation print pushed the S&P 500 0.26% higher on the day.

Meanwhile, upbeat AI earnings across Nebius and CoreWeave sent both stocks up more than 19% on the day.

Interest rates have sat in the 3.5-3.75% range since December, and in July three FOMC voters dissented in favor of hiking. 

Fed Chair Kevin Warsh, for his part, has spent much of this summer insisting that he won’t allow the central bank’s 2% inflation target to become 3%. 

“There is no soft implicit target, not on this committee’s watch,” Warsh said after the July meeting.

But whatever hawkish commentary Fed officials share isn’t likely to stop the likes of Microsoft, Amazon, Alphabet and Meta from pushing the pace on $5 trillion of capex over the next five years.

Adjusting rates from 3.75% to 4% is a rounding error in the context of hyperscaler spending that keeps getting revised higher.  

To be sure, this is not to say that macro indicators are no longer relevant.

They are.

But for better or worse, to capture the attention of this market, you need something more parabolic.

We talk about the AI race all the time in this newsletter, and everyone has a different take on whether OpenAI, Anthropic, Google, Meta or even SpaceXAI is in the lead. 

Whatever your favorite AI Lab is, there is a way to invest in it through Harbor Capital Advisors’ AI LabsEcosystem ETF Suite. 

These ETFs allow you to invest in the ecosystem behind the AI Lab you believe in most.

Search Harbor AI Labs ETFs wherever you invest, or follow HarborCapital on X to learn more.*

📊 Inflation cooled to 3.4% in July. Headline CPI rose 0.1% on the month and core CPI ticked up 0.2%, matching economist estimates and easing pressure on the Fed ahead of the September meeting. (Yahoo Finance)

🏘️ Trump officials floated cutting the capital gains tax on home sales. The proposal would raise or eliminate the current $250,000 single-filer and $500,000 married-filer exclusions and require Congressional action. (CNBC)

🤖 CoreWeave stock jumped 19% after doubling revenue. Second-quarter sales came in at $2.58 billion, up 112% year over year, with another $25 billion in commitments already booked in the current quarter that isn't yet in the backlog figure. (CNBC)

Bob Elliott is a veteran macro investor and the CIO at Unlimited Funds, where he deploys hedge fund strategies in low-cost ETFs. We sat down to discuss how AI earnings are detached from reality, the bear case on $5 trillion AI capex, and where he sees value beyond the AI trade.

Tune in on Spotify, Apple Podcasts, and YouTube.

🗓 August 13, 1982: The Dow had bottomed at 776.92 the day before, and on August 13 the market ripped higher to begin an 18-year run that would gain more than 1,000% by 2000.

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*Visit harborcapital.com for a prospectus containing investment objectives, risks, fees, expenses and other important information. Read and consider it carefully before investing. Risks include principal loss and artificial intelligence-related risks. Harbor ETFs are distributed by Foreside Fund Services, LLC.

Harbor is not affiliated with Opening Bell Media, and the funds are not affiliated with, sponsored by, or endorsed by any AI lab.