by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the rising number of AI tools going rogue. We then focus on PMI reports and what they say about the state of the economy. Next, we turn to the latest developments in Iran, the Fed chair’s communication style, and concerns about a possible export ban on oil. As always, we conclude with a round-up of recent domestic and international economic data releases.

More Rogue AI: Meta has become the latest company to have its AI escape its testing environment and reach the internet. On Wednesday, the Facebook parent company confirmed that its Muse Spark 1.1 model had hacked into a third-party company following a cybersecurity test. This is the third such incident in the last two weeks in which an AI tool has found its way online. This is likely to raise fresh concerns about the lack of regulation as these tools continue to demonstrate the ability to act autonomously and evade their intended controls.

• The breach occurred during testing with the cybersecurity firm Irregular. The AI model gained internet access due to a misconfiguration in the testing environment’s setup. Irregular is reportedly the same vendor Anthropic used in a similar incident, in which its models also escaped onto the internet. Reports suggest the models exploited this access to work around constraints of the test.
• The breaches have led to worries that the White House may need to push for new regulations for frontier AI models. Earlier this week, Trump administration officials met with representatives from top AI companies to discuss a finalized testing framework. So far, the government has put an executive order in place that allows companies to voluntarily submit their models for government review for up to 30 days before public release, but there has been support for stricter measures.
• Another area drawing scrutiny is the treatment of open-weight versus closed-weight AI models. The latest draft of the framework specifically states that open-weight models — which are typically free, downloadable, and customizable — will not be subject to the rules. Closed models, like those offered by Anthropic and OpenAI, would be included in the executive order due to national security risks.
• The rise in rogue AI incidents poses a significant risk to markets, given their potential to disrupt companies. While none of these events have yet turned nefarious, the possibility of a future AI-driven attack, used to steal data or carry out other criminal activity, could undermine confidence in markets. Stronger guardrails will likely be needed to prevent a worst-case scenario.

Economic Resilience: The latest Purchasing Managers’ Index reports support the view that the economy remains firmly in expansion. This week, both the Institute for Supply Management and S&P Global released their PMI readings, showing that economic activity remains solid. S&P Global saw business activity pick up to its highest level since October 2025, while ISM saw activity reach its highest level since before the Iran conflict. The strong readings reinforce the view of sustained growth in the economy.

• Both indexes showed increases in July. S&P Global’s services index saw the biggest gain, rising from 51.9 to 54.5, while ISM’s services index posted a modest increase, from 54.0 to 54.1. The biggest contributor to the rise was business activity, which was driven in large part by spending tied to the FIFA World Cup and the US’s 250th-anniversary Independence Day celebrations, which fueled a surge in tourism and consumer spending. Nonetheless, robust demand for AI also contributed to the increased readings.
• While the growth was strong, there were still signs of underlying problems within the economy. Respondents continued to express concerns about uncertainty in the Middle East, as well as tariff pressures. The ISM Prices Index rose to 70.3, a sign of heightened inflationary pressure. According to S&P Global, cost pressures stemming from higher raw material prices forced respondents to pass those increases on to their consumers.
• The latest PMI readings suggest that while the economy is still dealing with uncertainty from the conflict in the Middle East, its underlying momentum remains intact. The solid performance was largely driven by consumers willing to look past higher prices to take part in July’s events, which helped provide a meaningful boost to consumption. However, the pace of spending may ease this month. We continue to view the economy as resilient in the face of economic shocks.

Agreement on Strait: Iran has announced that it has reached an agreement with Oman to reopen the Strait of Hormuz. The agreement would establish a temporary shipping corridor lasting two to four months, allowing vessels to transit the Islamic Republic’s territorial waters, with free passage guaranteed for the duration of the period. Iran has indicated that the deal is contingent on the United States halting hostilities at sea, but its leadership does appear prepared to move forward with an interim arrangement.

Warsh Communication: Fed Chair Kevin Warsh will continue to maintain his stance of limited communication with markets. A report indicates that Warsh has privately acknowledged making mistakes in his first 10 weeks as Fed chair, specifically sowing confusion about the path of rates, but he does not believe that he should reverse course. His remarks reaffirm the Fed’s commitment to price stability and come amid growing concern that his lack of communication has undermined his credibility.

Oil Export Ban? Members of the oil industry are worried that the president’s recent criticism of high domestic gasoline prices could lead to an export ban on petroleum. Industry representatives have reportedly been lobbying in Washington to prevent such a measure from being put in place. While no formal export ban has been proposed, the president’s decision to direct the Department of Justice to investigate possible price gouging by oil companies has unnerved industry executives.

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