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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