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Tuesday, November 10: The Fed Gets Louder, Equities Don’t Listen End of Day Summary October CPI came in hot. Core rose 0.3% against 0.2% expected (0.296% unrounded), the second straight 0.3% print, and headline rose 0.4%. The same morning, Fed Governor Waller said he supports a 25bp hike in December and that 50bp “should be considered” if core ran around 0.3% or more, which it did. He also argued that lower oil isn’t relief, because energy may now pass through to core inflation, and that the AI buildout is pushing up tech goods prices. In the afternoon, Vice Chair for Supervision Bowman turned more hawkish than in October, saying “progress on lowering inflation has disappointed” and estimating October core PCE at 3.3%. She stopped short of endorsing a hike, though: she said further tightening has to be weighed against its costs for rate-sensitive sectors. The most important part of her speech was a detailed warning on AI financing. She said AI-related debt is on track to exceed $800 billion this year, off-balance-sheet commitments are more than three times that, and the structures create “the appearance of circular financing.” If AI revenues disappoint, she expects a sharp correction in AI equities and tighter credit, which would slow both growth and inflation. The bond market took it seriously. The 2-year rose 17bp to 4.74%, and the 3-month to 2-year spread widened 9bp to 50.8bp as December hike pricing came back. The curve bear flattened, with 2s10s down 7bp to 25bp, and the 10-year finished at 4.99% after briefly trading above 5%. Real yields drove most of the move: the 2-year real yield rose 13bp to 2.51%, the highest of this cycle. Front-end breakevens rose too, with the 1-year inflation swap up 13bp on the CPI print even with oil lower. The 5y5y inflation swap fell 2bp, a sign the bond market is rewarding a Fed willing to tighten. The dollar rose 0.6%, the yen weakened to 158.72 (moving toward 160, where Japan has intervened before), and gold fell 1.8% to $4,039. Equities barely moved. The S&P fell 0.4% to 7,521, NQ 0.5% and the Russell 0.6%. VIX actually closed lower at 19.5, still below VIX3M, and implied correlation fell to 12.5. Credit agreed with equities rather than rates: CDX IG was flat, HY widened 2bp, and the hyperscaler spread index tightened to 163.6bp, its lowest since the November 3 rebalance. The damage stayed concentrated in the AI suppliers, with IREN down 7.9%, Nebius 5.3% and Cerebras 3.1%. Long-dated Alphabet and Meta-linked bonds fell about 0.8 point, which was a rates move, not credit. The bigger story is the gap. Since Friday’s close, the 2-year yield is up 22bp and the 2-year real yield 25bp, and two Fed governors have turned more hawkish. Over the same two sessions, the S&P is up 2%, VIX has fallen from 25.6 to 19.5, and hyperscaler spreads have tightened. Dealer positioning after Monday’s vol crush is likely keeping the index pinned. Moves this far apart usually close one of two ways: either the Fed backs off, or equities and credit reprice toward rates. My sense is that it will be the latter

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2d ago on

Week in Review: The Buildout Meets the Ballot Box The election did not remove the AI credit risk we have been tracking. It moved it. The market spent the week separating the companies that spend on AI infrastructure from the companies that depend on that spending, and then, on Thursday, pricing what slower data center construction means for growth. 1. The election hit the suppliers, not the spenders. Democrats won both chambers of Congress, and governors-elect in Texas, Georgia and Ohio campaigned on moratoriums or pauses for new data center construction. Meta CDS tightened about 11bp on the week and Alphabet and Meta-linked bonds rose more than a point, while the CoreWeave-linked Helios bonds fell 2.6 points, CoreWeave CDS widened 31bp and most AI supplier stocks fell 2% to 8%. 2. Less inflation, no help from the Fed. WTI fell 6% to about $90 on Iran headlines and took 34bp out of 1-year breakevens, but the 2-year real yield rose 14bp. Friday's strong payrolls (165k against 70k expected, with upward revisions and 0.4% wage growth) put a December hike back on the table, with next week's CPI as the deciding print. 3. A rotation turned into a liquidation, and credit held. Implied correlation went from 9.7 on Wednesday to 22.3 on Thursday as the S&P fell 4.4%, and VIX finished the week at 25.6, above VIX3M. Yet CDX HY ended the week 1.7bp tighter. This is a growth scare in the AI supply chain and in equity positioning, not a broad credit event. Main expressions: Nasdaq against the S&P (NQ -3.7% against -2.2% for the S&P), near-dated volatility into CPI, and a curve view that is two-way into the print. The Week Day by Day • Monday: oil and Oracle. WTI fell about 6% to $96.46 on hopes for an Iran deal. Inflation pricing collapsed at the front, but the S&P reversed from +0.5% to -0.5% as the AI complex sold off. Oracle filed a $10bn common stock offering alongside $10bn of senior notes; its stock fell 8.8% and its CDS widened about 20bp. Amazon CDS closed above 100bp. • Tuesday: election day. Oracle's equity was well received, and the AI supplier stocks bounced 4% to 11% on short covering. Real yields rose 4 to 5bp across the curve, while the 9-day VIX held the election premium. • Wednesday: the sweep and the rotation. With Democrats winning both chambers and the president saying he had no immediate plans for strikes on Iran, oil fell 8% to $88.45 and 1-year breakevens fell 25bp. Money rotated violently: the platforms (Microsoft +6.7%, Amazon +6.1%), homebuilders (+7%), retail, banks, staples, healthcare, Europe and China rallied, while memory, storage, the neoclouds and energy fell 5% to 10%. CDX HY tightened 14.5bp, and implied correlation fell to 9.7. • Thursday: the governors. The market priced the state-level results. The S&P fell 4.4%, NQ 6.8% and EM 6.0%. VIX rose to 27.8, above VIX3M, and correlation more than doubled. The 2-year fell 12bp, led by real yields, and the yen was bid while the Australian dollar and Korean won fell. Blue Owl fell 7%, Helios 1.5 points, and the AI supplier stocks 10% to 17%. Hyperscaler spreads and single-name CDS (Oracle +12bp, NVIDIA +7bp) widened, though by less than broad credit in percentage terms. • Friday: payrolls. A strong report pushed the 2-year up 5bp in a bear flattener and took back part of Thursday's Fed-cut pricing. The supplier stocks bounced (IREN +20%), but the hyperscaler spread index widened again while broad credit tightened, and the volatility curve stayed inverted into the weekend. Rates: Lower Inflation, Higher Real Yields • The defining move was in real yields. The 2-year breakeven fell 23bp and the 2-year real yield rose 14bp, leaving the nominal yield only 8bp lower. Lower oil cuts headline inflation, but the Fed targets core, so the market lowered its inflation outlook without lowering its expected policy path. In real terms, policy tightened. • The curve steepened on the week, then flattened on payrolls. 5s30s rose 3.9bp, but most of the steepening came on Thursday's growth scare and was partly reversed by Friday's strong data. The long end lagged all week, as the 30y fell only 2bp. • The long-run anchor held. The 5y5y inflation swap ended the week at 2.37%, essentially unchanged. The market is not pricing a lasting disinflation from the AI slowdown. Why It Happened Three forces drove the week, and they pulled in different directions. • Data center politics. The results in Congress and in the governor races turned voter frustration with data center costs into policy risk. Governors-elect in Texas, Georgia and Ohio promised moratoriums, pauses or strict conditions on new construction, and the backlash crossed party lines before the vote: the outgoing Texas governor had already paused new grid connections and permits. The market first read this as good for the spenders, then as a threat to growth in the supply chain. • Oil and Iran. Hopes for a deal, followed by the president saying he had no immediate plans for strikes, took WTI from above $96 to about $90. That lowered inflation pricing sharply, eased financial conditions and supported the rotation into housing, retail and consumer names. • A strong labor market. Friday's report showed hiring accelerating, with the 3-month average jumping to 137k, unemployment falling to 4.1% and participation rising. Two details complicate the hawkish read: wage growth over the year slowed to 3.1% from a revised 3.2%, and underemployment rose 0.3 points to 7.9%. Positioning amplified each move. The post-election rally was largely hedges being monetized after the event, and the rotation unwound two years of crowding into the AI hardware chain and the inflation trade. Thursday's liquidation came as that crowding met a growth scare, with volatility-targeting and options-hedging flows adding to the selling once the S&P fell more than 2%. The framework: two weeks ago, the Fed put was struck lower because inflation kept Warsh from responding to AI credit stress. This week, lower oil should have moved the strike closer, but strong labor data and firm wages pushed it out again. The risk is a Fed tightening into a slowdown concentrated in the AI supply chain, where the cost of capital is already rising. Next Week's Event Risk: CPI and the December Fed After Friday's payrolls, the December FOMC is live for a hike. Core CPI decides it. Strong hiring and 0.4% monthly wage growth make the case; lower oil, slower annual wage growth and the rise in underemployment give the Fed reasons to wait. Beyond the data, watch for any capex guidance from the hyperscalers in response to the state-level results, and for the reported Anthropic IPO marketing, which would be the largest test of the AI funding window.

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4d ago on

Week in Review The election didn't remove the AI risk. It moved it. Governors-elect in Texas, Georgia and Ohio campaigned on data center moratoriums, and the market split the AI trade in two. The spenders' credit improved: Meta CDS ~11bp tighter, Alphabet and Meta-linked bonds up more than a point. The suppliers took the hit: CoreWeave CDS +31bp to 1,162, the CoreWeave-linked Helios bonds -2.6 pts, Nebius -8%. Thursday turned that rotation into a liquidation. S&P -4.4%, correlation from 9.7 to 22, VIX above VIX3M into the weekend. HY still finished the week tighter. A growth scare in the AI supply chain, not a credit event. Meanwhile the Fed got further away, not closer. Oil fell 6% to ~$90 and took 34bp out of 1y breakevens, but the 2y real yield rose 14bp. Then payrolls came in at 165k vs 70k, with upward revisions and 0.4% wage growth. A December hike is back on the table, and CPI next week decides it. The risk: a Fed tightening into a slowdown concentrated in the AI supply chain.

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1w ago on

What to watch today •AI-capex follow-through: Nasdaq-100 futures -2.3% after Amazon/Alphabet/Intel; watch for broader tech de-risking into month-end. •Oil headline risk: Hormuz tanker mining plus Houthi-Saudi missile exchange keeping Brent near six-month highs; any confirmed US/Israeli strike on Iran would be a fresh catalyst. •December Fed repricing: markets now favor a hike, not a cut, at the December 9 meeting; watch for post-blackout Fed commentary pushing back or confirming. •Energy earnings: Exxon, Chevron, BP reporting premarket into a spiking crude tape. •Month-end flows: steepest monthly Kospi and China declines in years likely to drive rebalancing into the close. •Midterms on Tuesday (Nov 3): next major catalyst, with Iran-strike timing and Fed-independence rhetoric both tied to the outcome.

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1w ago on

Two days, one Fed meeting and more than $100bn of new AI fundraising have changed the conversation. On Wednesday, Warsh held rates over two hawkish dissents, gave no signal for December, and said on the record that AI financing and credit spreads are on the Fed’s radar. Bonds priced a Fed that will tolerate inflation: 1y breakevens rose 6bp, the curve steepened, and the 10y held above 5%. On Thursday, core PCE came in firm, with only 6% of the basket rising at a 0 to 2% pace and housing running at 4.2% annualized. Bonds ignored it. The 2y fell 10bp, the 10y slipped to 4.94%, and by the close real yields were leading the rally. The market has stopped asking whether Warsh hikes and started asking how much AI credit stress it takes before he eases. The pressure is landing on the suppliers, not the spenders. IREN, Nebius, CoreWeave and Oracle fell 5% to 9%, and the Galaxy Helios data center bond dropped more than a point, while Alphabet’s own 2046 bond was flat. At the same time the hyperscalers went to the capital markets in size: up to $95bn of equity from Meta and $25bn+ of bonds from Microsoft against more than $100bn of demand, following Alphabet’s $85bn equity raise in June. Nvidia, AMD and Broadcom are buying Meta stock so Meta can keep buying their chips. Credit is wider but orderly. Hyperscaler spreads widened about 6bp, CDX IG 1.3bp, and HY moved in step with IG. That’s the “mild widening” Warsh described, not a credit event. The more telling move was in volatility: S&P implied correlation jumped from near record lows as dispersion fell, a sign that the AI stock picker’s market that has kept index vol suppressed is starting to unwind. After the close, Amazon missed and still guided to about $220bn of capex. The hyperscalers aren’t cutting spending. They’re borrowing to keep it going. That’s good for the suppliers and bad for hyperscaler credit, and it undercuts the disinflation story the front end priced on Thursday. Real-economy spending on data centers, power and construction isn’t slowing, and that leaves Warsh without the cover to ease. That’s the tension. Bonds are pricing the Warsh AI credit put before credit has broken, with sticky inflation in the way. If credit holds, the front end has run ahead of itself and hike risk comes back. If credit cracks, inflation keeps the Fed waiting longer, and when it does move it has to move fast. What decides it is the funding window. As long as the biggest names can raise money cheaply, the AI loop holds. The checkpoints are Amazon, Oracle and CoreWeave CDS, whether VIX moves above VIX3M, and above all the Anthropic IPO, with marketing reported to start as soon as November 9. A clean book says the window is open. A struggle is the closest thing on the calendar to the moment the market stops pricing out hikes and starts pricing a rescue.