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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