We had quite the week.
Beats came in on both the September US CPI and PPI prints, with the former generating a notable (and very much tradeable) bid in the USD and US Treasury yields. However, shortly after, news about CoreWeave and credit stress fuelled concerns about the AI trade. Couple that with Fed Chairman Kevin Warsh remaining tight-lipped at the IMF meeting last Friday (investors expected a little more after the hot inflation data), and the market reversed, with the buck and yields turning lower.
The benchmark 10-year US Treasury yield closed down about 25 bps from its weekly high. Hot inflation pushed one way, while AI fear pushed the other. This was not isolated to the US; UK Gilts also caught a bid, suggesting bonds may be reasserting themselves as a haven.
US Stocks on the Back Foot
In equities, most major US benchmarks finished the week in the red, with the Nasdaq 100 down 5.5% and the S&P 500 down 2%. Hotter inflation readings undoubtedly weighed on sentiment, but AI hit the tech sector hard and drove most of the decline. The Dow reflected this, adding 0.7% on the week as funds moved from tech into Dow names, bolstered by solid earnings from its heavyweights. If it were only about inflation, the Dow would have ended in the red as well.
However, while the losses in these major indices aren’t a pleasant picture, we are still just a whisker from record highs. This remains a marked uptrend by any measure, and trends ebb and flow, so a pullback is entirely normal.
Market Snapshot
Asia is trading defensively this morning after Friday’s chip rout. Japan’s Nikkei 225 is down about 1%, while South Korea’s KOSPI is up 0.4%, recovering from an opening drop of about 2.8% after seven straight sessions of selling. European and US equity index futures are also higher this morning, pointing to a positive start to cash trading.
Elsewhere, apart from the AUD up 0.4%, FX is quiet heading into Europe. USD/JPY is finding support around ¥157.89, while Brent is down about 2% as crude eases from its recent run to US$110. Treasuries are higher as bonds find a modest bid again.
Week Ahead
Today’s focus is the September Canadian CPI inflation report. Markets are pricing in a ~29% chance of an October BoC hike; a hot Canadian CPI print today could quickly move those odds to a coin flip and underpin a CAD bid. The BoC’s preferred core measure (the average of CPI-median and CPI-trim) sits near 2%, so I will be watching for a move above this figure.
We have an eventful week for UK data, with August jobs on Tuesday, September CPI inflation on Wednesday, and September retail sales and the October S&P Global manufacturing and services PMIs on Friday. Several MPC members also hit the wires this week.
I expect much of the focus to be on Wednesday’s CPI inflation figures. I believe the BoE will ultimately have to hike rates to keep pace with other DM central banks, otherwise this could weigh on the GBP and bring in imported inflation. In isolation, however, I do not see why the BoE would need to hike; the UK economy does not really need tighter monetary policy. Core inflation has printed 2.6% for four months running, and there’s little sign yet that the oil shock is feeding into broad domestic price pressures.
The market, though, is pricing in four BoE hikes, leaving room for a soft print to trim the path, especially if Tuesday’s wage data also cools.
Q3 reports from Meta, Tesla, IBM, American Express, and 3M also land this week. After a strong Q2, the bar is high, and good numbers can still disappoint if they fall short of expectations. The market wants evidence that AI spending is returning value.
Written by FP Markets Chief Market Analyst, Aaron Hill
