RECAPPING LAST WEEK
U.S. equities came under renewed pressure this week as hotter–than–expected inflation data
forced investors to reassess both the interest rate outlook and the sustainability of the AI
investment boom. The September CPI report showed headline inflation rising 0.6% for the month
and 3.7% year–over–year, while core CPI increased 0.3% for the month and 2.6% for the year—this
reading comes in above both the Fed’s stated 2.0% target and the high end of economist
expectations. Thursday’s PPI report was even more concerning, with producer prices rising 6.3%
year–over–year versus expectations of 5.4%. The reports initially pushed Treasury yields higher and
weighed heavily on technology stocks, with the Nasdaq suffering its largest one–day decline since
July. The week’s tech selloff may have begun due to concerns about higher interest rates but
continued due to renewed concerns over the enormous amount of debt being used to finance the AI
infrastructure buildout. CoreWeave became the focal point of those concerns, with its shares falling
sharply, the yield on its unsecured 5–year corporate bond rising to over 15% and the 5–year credit
default swaps (the cost to insure that debt) rising to over 11%. These concerns spilled over into the
broader AI complex, particularly impacting companies dependent on continued access to cheap
capital to fund aggressive expansion. The deterioration in equities ultimately produced a flight–to–
quality move into Treasuries, driving 10–year yields down toward 5%. The bond rally helped stabilize
equities on Thursday as investors took comfort in the reversal of yields that had been pushing
steadily higher. However, the selloff in equities resumed on Friday and coincided with an intraday
spike in the VIX above 22 before closing just beneath 20. The increase in the market’s “fear gauge,”
reflected via option pricing, is anticipating additional volatility in the coming days. Energy markets
rallied as geopolitical risks intensified. A container ship and a dry bulk carrier were sunk as Iran
cast doubt on US claims to be in sole control of that contested waterway. Combined with Houthi
attacks on Saudi energy infrastructure, this escalation kept crude oil prices firm throughout the
week. Refining margins for diesel remained near the post–Iranian conflict record levels we’ve
highlighted over the past several weeks. The International Energy Agency warned this week that it
expects the global diesel market to remain extremely tight well into 2027, primarily due to loss of
refining capacity in the Middle East and Russia. In other macro sectors, the Dollar rallied further into
one–year highs off the back of the hotter–than–expected CPI report before reversing course late in
the week as Treasury yields declined. The response from gold and crypto was precisely the
opposite, though far more muted—they were each pressured a bit in the immediate aftermath of the
CPI report then regained their footing with the Treasury rally. Late–week reversals only took a little
pressure off emerging markets as South Korea and Taiwan were affected much more by the
AI/semiconductor trade than by macro currency and interest rate influences.
THE WEEK AHEAD
The coming week will offer investors another opportunity to assess the resilience of the U.S.
economy as markets continue to balance persistent inflation pressures against growing concerns
about the outlook for growth. Housing will be a particular focus, with the NAHB Housing Market
Index releasing Monday, followed by September building permits and housing starts on Tuesday.
With 30–year mortgage rates recently climbing to 7.4%, the housing sector faces renewed
affordability pressures at a time when elevated home prices are already weighing on demand.
Beyond housing, investors will remain focused on the fallout from the recent selloff in the
semiconductor sector and the weaker hands in the AI infrastructure buildout space. The resulting
flight to quality bid in Treasuries that lowered yields on the longer end of the curve will bear close
scrutiny—can these levels be maintained or were they a temporary knee–jerk response to AI debt
concerns. If investors feel confident that we’ve already seen the high point in yields, that could
provide the fuel needed to push the markets higher. Even with all the headline grabbing news in
the AI sector, the S&P 500 remains only a few percent off its all–time high
(Schwab)
