Tech Repricing Ahead of Payrolls

MACRO FRAME

Investors are rotating out of tech as a Q3 earnings reflect sharp drops in free cash flow. Recent price action suggests a repricing of the AI trade rather than a deterioration in macroeconomic sentiment.

STOCK INDEX FUTURES

Equity index futures were higher overnight. Friday’s selloff highlights a repricing of the AI trade rather than a deterioration in the macroeconomic outlook. As the Nasdaq has fallen roughly 9% from its peak, the Equal Weight S&P 500 has continued to advance, suggesting that weakness remains concentrated in large tech rather than spreading across the broader market. Notably, this contrasts with earlier pullbacks in the AI-led rally, when broader equity indexes also declined. This divergence is consistent with investors reassessing AI-related valuations and earnings expectations, which comes in line following Disappointing earnings results from Amazon and Intel last week. Amazon’s quarterly results yesterday revealed capex of $77.26 billion, approximately $20 billion above estimates, and negative TTM free cash flow of $42.4 billion. Intel also reported softer-than-expect sales and lackluster guidance. For the indexes, the key risk is earnings estimates; over the last three months, the tech sector’s forward earnings estimates have risen 17%, double the S&P 500 as a whole. This week will bring more tech earnings, with Apple and Palantir set to report after market close on Monday, November midterms, and October payroll revisions. These events, paired with tight races and policy uncertainty alongside mounting AI spending worries set up conditions for volatility to persist through week-end. Today’s ISM manufacturing report will help assess whether resilient activity is accompanied by easing cost pressure.

CURRENCIES

US DOLLAR: The USD index is down 0.25% to 101.625, reflecting a drop in oil prices even as front-end rates edged higher. Despite the raft of data that came out last week the most evident driver of the dollar was the movement in the Nasdaq. While a slowdown in the entire tech sector is unlikely, investors have begun to reprice the AI trade, and seek US Treasury’s, which has reduced some near-term support for the dollar. This dynamic has lead DXY to largely mirror movements in the Nasdaq, leaving Apple and Palantir’s results after the bell today to drive direction in the index. On the macroeconomic front, October’s nonfarm payrolls data (63k est.) will help shape the narrative around Fed policy, though ultimately inflation data offers the best guidance on how the Fed will act on rates. December rate hike odds are priced at 78%, suggesting that for the dollar to continue an advance higher, those odds must move in tandem.

EURO: The euro is up 0.56% at $1.1221. Falling oil prices and rising risk sentiment are lifting the currency this morning. Hopes for a deal to end the US-Iran war and reopen the straight are responsible for the decline in oil prices. The ECB’s hawkish hold and forward guidance has all but guaranteed a rate hike at the bank’s meeting in December. However, the near-term path for the euro will be dictated by farther-out rate hike expectations. The euro’s upside, thus may be contained by the prospect that December’s rate hike will be followed by a pause. ECB estimates circulated ahead of the meeting suggested that higher bond yields would cumulatively lower growth by 1% and inflation by 0.9% over 2027–28 relative to September’s baseline projections. The implication for the euro is that additional tightening beyond a December hike raises downside risks to the medium-term growth outlook. Additionally, higher yields across the currency-bloc have already tightened financial conditions, reducing the need for additional tightening from the ECB. French fiscal and bond market stress will also continue to act as a headwind ahead of the French presidential election. Fitch revised their outlook for France to negative, suggesting that fiscal risks remain front and center. Money market expectations are pricing a 69% chance of a hike in December and 60 bps of tightening over the next 12 months.

BRITISH POUND: Sterling is 0.20% higher at $1.3418, drawing support from falling oil prices ahead of the Bank of England’s meeting later in the week, where it is expected to raise rates. Money market pricing of 100 bps of tightening by year-end 2027 is excessive and leaves the currency vulnerable to a pullback in those expectations. With the government’s recent budget announcement offering no surprises, price direction in the pound will be more reflective of BoE expectations and the Sterling’s relative strength over the euro. While the UK economy has shown resilience over recent months, the bank will likely remain cautious against future rate hikes to avoid slowing its fragile growth backdrop. Elsewhere, falling oil prices and hopes of a resolution to US-Iran hostilities will be supportive of the currency.

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 fell 0.17% to 157.79 yen per dollar. Finance Minister Satsuki Katayama overnight reiterated that Japan remains closely aligned with US authorities and would act against disorderly or excessively speculative moves. The BOJ held rates steady as expected last week but revised inflation forecasts higher. Governor Ueda said that underlying inflation has hit levels consistent with the bank’s 2% price target. That should open the door to future rate hikes from the BOJ. Money markets are nearly fully-priced for a rate hike in January and see 64 bps of tightening over the next 12 months. With the bank now cautious about overshooting its inflation target, it could potentially speed up the rate of hike from roughly every six months to every three months, leaving the door open for a hike at the December meeting. The BOJ characterized financial conditions as accommodative, though the pace of future hikes ultimately depends on upcoming data.

AUSTRALIAN DOLLAR: The Aussie is down 0.41% to $0.7003. The Reserve Bank of Australia will announce their policy decision on Tuesday, where it is expected to move rates higher. Q3 inflation data last week has been supportive of the currency. However, given that the currency is a broad-gauge for risk sentiment, a further downturn in AI sentiment and in the equity space leaves it vulnerable to a further pullback. Money markets are pricing an 85% chance the RBA raises rates in November and priced for a hike come December.

TREASURY FUTURES

Yields flattened the curve alongside the drop in oil prices and as investors remain positioned in Treasuries ahead of more tech earnings later in the day following last week’s sharp tech selloff. Today’s ISM prices-paid component will provide a more current view of manufacturing cost pressure, while the Senior Loan Officer Opinion Survey will help assess the credit restraint emphasized by Warsh after the October hold. Friday’s payrolls will be central to determining whether labor-market resilience continues to justify another increase. September’s PCE report at 3.6% y/y and core prices increasing 0.3% on the month to land at 3.1% annually argue against the narrative that the Fed can remain on hold.  Warsh did imply a hesitancy to raising rates higher, saying “the goal isn’t to throw sand in the gears of the economy and throw people out of work,” implying the Fed does not want to raise rates enough to actually slow the economy. This may reflect a slower pace of future tightening than what the market has/had priced in. However, upcoming data will ultimately be the factor that shapes the trajectory of Fed policy. If growth and inflation continue to grow, while labor conditions remain steady the Fed will likely need to raise rates by 50 bps over the coming 12 months. However, if the data proves accommodative, the market could experience a curve-steepening, reflected by a drop in short-term rates. Near-term risks to the Fed raising rates are in the form of a divided government post-midterms that results in a debt-ceiling gridlock, while the geopolitical risk of renewed US-Iran strikes complicates the oil trajectory. These conditions would add to volatility in the market that may result in the Fed want to remain on hold to avoid adding further stress to the market.

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