Continued Tech Weakness

MACRO FRAME

September’s CPI and PPI data continue to fuel expectations of a new hiking cycle from the Fed, while higher interest rates are adding to stress in credit markets.

STOCK INDEX FUTURES

Equity index futures were lower overnight; technology shares are under pressure again, threatening to interrupt Monday’s recovery as doubts about AI spending collide with another rise in oil prices. The weakness follows a disappointing debut for South Korean data-center infrastructure company Elice, whose shares plunged 32%. The Kospi fell nearly 4%, with memory-chip producers Samsung Electronics and SK Hynix among the decliners. Investors remain sensitive to the valuations and funding requirements that underpin the AI investment cycle. December Brent moved above $111 overnight, its highest level since May, as threats to Gulf shipping and Saudi infrastructure sustain a substantial geopolitical premium. Higher energy costs could weigh on corporate margins and consumer spending while complicating the path toward lower inflation. Netflix reports after the close, following a premarket slate that includes GE, RTX, Northrop Grumman, General Motors, 3M and Philip Morris. Earnings guidance will test whether strength outside technology can offset the AI correction and higher energy costs. Friday’s flash PMIs will provide a broader read on activity and pricing pressure.

CURRENCIES

US DOLLAR: The USD index fell 0.25% to 101.72. The currency market has been assessing the impact of  last Wednesday’s AI sell off, noting that the market’s moves may be a hint of the reaction function to a major AI-driven selloff, with the dollar falling instead of attracting safe-haven demand. The dollar index looks to be finding strong resistance at the 102.50 level. Money markets assign a 15% probability of a hike this month and remained fully priced in for a hike by year-end. On Friday, Fed Chair Kevin Warsh declined to indicate the likely outcome of this month’s Fed meeting but noted that stronger-than-expected inflation had not changed his assessment of the US economy.

Watch point: While current fiscal, macro, and geopolitical factors favor the dollar, it is beginning to enter overbought territory and could be susceptible to a modest correction.

EURO: The euro rose 0.15% to $1.1229. Somewhat calmer conditions in France have offered some relief, but the lower house’s budget vote and persistent concerns about public finances are set to remain in the spotlight as key concerns. French fiscal risks represent a key headwind for the euro, with recent gains coming from dollar weakness instead of a fundamental change in the fiscal outlook for France. ECB President Lagarde said energy-driven inflation had yet to spread across the broader euro-area economy; ECB policymaker Šimkus warned that further rate hikes could be necessary as price pressures continue to build, adding that an increase as early as this month remained possible. Any slowing of its tightening cycle could further weaken the euro’s relative rate support.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling is 0.11% higher against the dollar at $1.3371. Sterling is outperforming after stronger-than-expected UK labor-market data reinforced expectations of a November Bank of England hike. Unemployment fell to 4.7%, compared with expectations of 4.9%, while pay growth exceeded forecasts and the preliminary payroll measure increased. The distinction is between confirming the next hike and validating the full tightening path. Money markets almost fully price a quarter-point increase on November 5 and four hikes by the middle of next year. However, declining vacancies still point to subdued labor demand. The report reinforces a November move rather than making a compelling case for a more aggressive sequence thereafter; energy prices and their effects on wages and domestic prices remain central. Elsewhere, finance minister Healey said Britain’s new budget would include measures to counter the energy price shock and reiterated that the budget will meet fiscal rules.

Watch point: We expect the pound to regain some lost ground against the dollar amid increased expectations over a November rate hike, but still ultimately favor a stronger dollar over Q4 2026.

JAPANESE YEN: The yen rose 0.28% to 158.04 yen per dollar. Japan’s 20-year government bond auction attracted bids worth 5.84 times the amount sold to mark the highest ratio since issuance began in 1987. The result reflects evidence that higher domestic yields are attracting institutional demand, with Japanese bonds also offering an alternative to European fiscal and political risk. One auction does not establish a lasting currency trend, but the demand provides a firmer, more supportive domestic backdrop for the yen. Markets now price 18 bps of tightening be year-end. The currency remains under broad pressure from US rate differentials and a market that is unconvinced the central bank will raise rates in a timely manner. The greatest near-term upside risk for the currency remains market intervention.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie rose 0.21% to $0.6993. Market focus is on comments from Reserve Bank of Australia Deputy Governor Hauser on Wednesday and third-quarter inflation data Thursday following soft jobs data that showed employment fell 39,300 in September. The report marked the largest drop in employment in a year, against expectations for a rise of 20,000. Market expectations of a November hike have been are at 30%, while a move in December is priced at 47%. The drop in labor market conditions should give the RBA some more confidence that policy settings are adequately restrictive.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields edged higher at the front end and lower at the long end overnight. The two-year/10-year spread is approximately 33.60 bps, compared with 38 bps on Monday. December Brent is near $111 and December WTI is above $100 as shipping threats and regional attacks sustain a sizable risk premium. Prices remain supported despite relatively strong Persian Gulf flows, underscoring the gap between current supply availability and the risk of disruption. Markets continue to favor an October Fed hold followed by further tightening later. Wednesday’s 20-year Treasury auction and Thursday’s five-year TIPS auction will test demand for nominal duration and inflation protection. Treasuries are also regaining some defensive appeal as investors reassess the debt surrounding the AI buildout, the main signal being the rally in Treasuries despite the hot CPI and PPI prints last week and the Fed’s October Beige Book revealing intensifying input-price pressure, including higher oil and diesel costs moving through freight and supply chains. While the hawkish Fed has led the curve to flatten amid contained inflation expectations, we continue to see upside risk to long-term borrowing costs if growth remains resilient. For now, we expect that the dramatic rise in longer-term borrowing costs has been overdone and that the market is set to embark on a slower rise toward higher long-term yields.

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