Edward Hayden-Briffett
Research Analyst, The Officials
Credit Markets Wary of AI Boom, Chinese Inflation, Japanese Service Sentiment
AI credit risks rise; China inflation softens, Japan data strengthens, but yen weakens despite hawkish BoJ signals.
Credit markets are starting to show more caution around the AI investment boom, even as equities remain strong.
Credit spreads for major AI-related companies have widened sharply in recent weeks, raising questions over whether lenders will keep funding spending at the current pace. AI infrastructure has become a major macroeconomic force; Columbia Business School’s Stijn Van Nieuwerburgh estimates AI investment at around 2.8% of US GDP and argues the economy could otherwise be in recession. With capex still expected to rise, credit conditions may become an increasingly important constraint on the AI buildout.
Chinese inflation softened dramatically in July, with CPI down to 0.5% y/y, half the June rate and below 0.8% expected. It’s the lowest since January, dragged down by food costs. The core measure was steadier at 0.9% y/y, following 1% in June. PPI was stronger again at 3.5% y/y, remaining positive for the fifth consecutive month after being negative from October 2022 to February 2026.
Japan’s service sentiment rose to 45.7 in July, a third straight monthly gain and the best since February, led by household-facing food and beverage firms. The forward-looking outlook index also firmed to a five-month high. Bank lending stayed robust at +5.4% y/y even after cooling from June's five-year high.
The BoJ's July summary read hawkish: underlying inflation is nearing 2%, upside risks are building, with one member flagging that hikes could come faster than markets expect.
None of this is helping the yen. It punched back through 158/dollar on Monday, unwinding Friday's post-payrolls bounce and shrugging off last week's intervention.
Additionally, Japan's current account swung to a 923bn yen deficit in June - its first since January 2025. This was against expectations for a 1.5tn yen surplus. Exports grew a healthy 16.3% on AI-related electronics, but imports jumped 24.3% on crude oil purchases, flipping the goods balance into deficit. A sharp fall in overseas investment income compounded this.
No key data today.
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