Two things happened this week that do not fit neatly together, and that tension is worth sitting with. Technology stocks sold off hard as new Chinese artificial intelligence models landed with dramatically lower costs, repricing what it takes to build and run the infrastructure American companies have been spending fortunes on. At the same time, oil moved sharply after the Straits of Hormuz situation flared back up, before partially recovering to around eighty-two dollars a barrel. Two separate shocks. Both pointing in the same direction: the earnings assumptions baked into markets right now may be more fragile than the top-line numbers suggest.

Our aggregate signal is risk-off at seventy-five percent strength as of this morning. That is not a panic reading, but it is not a shrug either. It means the weight of the evidence we track is telling us to be thoughtful, not bold.

What the data is actually saying

Start with inflation, because it is the hinge everything else swings on. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures measure, showed headline prices running at a little over four percent above a year ago as of May. Core, which strips out food and energy, sits at three point four percent year over year. The one-month pace annualized is worse: headline running at about five and a half percent, core at about four percent. Those are not numbers the Fed can cut rates around.

The Fed’s policy rate stands at three point seventy-five percent. The two-year Treasury, which tracks where markets think the Fed is headed, sits at four point twenty-one percent. The market is pricing in more, not less, relative to where the Fed is today. That is a real gap, and it tells you bond investors are not yet convinced inflation is on its way down.

Meanwhile the real policy rate, the Fed’s rate minus core inflation, is essentially flat at about a fifth of a percentage point. That means money is barely expensive in inflation-adjusted terms. The economy is not being squeezed by borrowing costs the way you might expect given the headlines about rates.

The yield curve, measured as the gap between ten-year and two-year Treasuries, stands at positive thirty-seven basis points. In plain terms, longer-term borrowing costs a bit more than short-term, which is the normal shape. That is mildly constructive for the economy in a textbook sense, but it is a thin margin, not a wide-open green light.

The extra interest that investors demand to lend to shakier companies, relative to what they charge the government, stands at two hundred sixty-nine basis points, or about two and three-quarters percentage points. That is not a distress reading. Credit markets are not flashing a warning. But it is worth watching, because credit spreads tend to move before the economic data does.

Consumer sentiment is at forty-four point eight, which is a deeply uncomfortable reading. Unemployment sits at four point two percent, so people have jobs. But they do not feel good. That gap between being employed and feeling financially confident has been the defining tension in this cycle. Energy prices are likely a big part of the explanation, and some relief there from the Hormuz reopening could shift consumer mood in the second half of the year.