Steady Trade Ahead of October CPI

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 are recovering as traders continue to buy the dip in tech shares ahead of Tuesday’s inflation data. A volatile week in which concerns about tighter data-center regulation and the sustainability of AI investment pushed the Nasdaq into correction territory. Lower oil prices are providing some relief, but strong employment data and elevated expectations for a December Fed hike remain headwinds for valuations. The central question is whether the recent selling represents a broader deterioration in risk appetite or a rotation away from crowded technology positions. Last Thursday’s declines extended across all S&P 500 sectors, suggesting the weakness was not confined to AI, although technology and semiconductor shares suffered the largest losses. A sustained recovery will likely require greater confidence in both the inflation outlook and the durability of AI-related spending. CoreWeave, Applied Materials and Cisco earnings will provide the next company-level tests. Investors will scrutinize financing conditions, infrastructure spending and demand visibility for evidence that the AI buildout can continue despite political and regulatory uncertainty. A firm CPI reading would add another challenge by reinforcing expectations for further monetary tightening.

CURRENCIES

US DOLLAR: The USD index is 0.44% lower at 101.854, giving back part of Friday’s sharp advance as improving risk appetite and lower oil prices reduce demand for defensive positions. Stronger-than-expected employment data reinforced expectations for a December Fed hike. The pullback looks more like a partial reversal of that move than a decisive shift in the dollar’s underlying support. Payroll growth of 165,000, substantial upward revisions, and a 4.1% unemployment rate indicate that the labor market remains resilient. Markets price an 81% probability of a December increase.

EURO: The euro is 0.48% higher at $1.1198. Eurozone finance ministers will discuss candidates to replace ECB President Christine Lagarde on Monday. While unlikely to make any announcements, likely candidates are Dutch former central bank governor Klaas Knot and the head of the Bank for International Settlements, Pablo Hernandez de Cos, from Spain. Lower oil prices are supporting the currency, last week evidenced that energy was the primary driver of European rates and consequently the euro. However, price pressures remain; markets assign roughly a 61% probability to a December hike and are fully priced for a rate hike in February. French fiscal concerns remained a potential constraint. The ECB’s hawkish hold and forward guidance has all but guaranteed a rate hike at the bank’s meeting in December. The euro’s upside, however, is likely to be contained by the prospect that December’s rate hike will be followed by a pause.

BRITISH POUND: Sterling rose 0.52% to $1.3419. This week’s UK GDP report is expected to show third-quarter growth of 0.7%, although the lingering squeeze from higher energy costs remains a risk to household spending. The BoE’s increase to 4% and indications that further tightening may happen provide a domestic source of support. Governor Andrew Bailey cautioned that the increase was not necessarily the start of a lengthy hiking cycle, but indicated that another move would likely be needed unless the Middle East conflict is resolved. With markets already anticipating three quarter-point increases next year, sterling remains sensitive to any guidance that tempers those expectations. 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.

JAPANESE YEN: The yen is 0.35% higher at 157.90 yen per dollar. Expectations for additional Bank of Japan tightening remain relevant, but the stronger US employment report offers a potential offset through US rate expectations. Minutes from the Bank of Japan’s September meeting reinforced expectations for further tightening. Some policymakers raised the possibility of faster increases following September’s hike to 1.25%, and markets widely anticipated another move in December. Discussion of the neutral and terminal policy rates also highlighted the BOJ’s growing focus on how much further borrowing costs can rise without unduly weakening activity. Money markets are fully-priced for a rate hike in March and see 50 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.

AUSTRALIAN DOLLAR: The Aussie is up 0.48% to $0.6896. Markets are leaning toward the view that the RBA’s latest increase marked the peak in rates, with swaps pricing about 30 bps of easing by the end of next year. The National Australia Bank reported a sharp drop in its annual profits last week, while a historical department store in Australia, David Jones, entered administration in what the market is eyeing as signs that Australia’s economy is slowing. Slower economic growth likely results in a weaker labor market backdrop, which would reinforce expectations that the Reserve Bank of Australia is done with its rate hiking cycle. The bank hiked rates 25 bps in a split 6-3 decision and removed language explicitly stating its willingness to raise rates further if necessary in its policy statement earlier this week.

TREASURY FUTURES

Yields moved lower across the curve. The rates outlook remains caught between resilient economic activity and instability in equities. Tuesday’s CPI report will test whether current tightening expectations are sufficient. A firmer-than-expected reading could push investors to price a more restrictive policy path into 2027, particularly if underlying inflation remains persistent. A softer report would ease some of that pressure, although the strength of October’s employment data could limit how far expectations for a December hike retreat. Lower oil prices are also offering some pressure on rates today. Treasuries face competing influences: equity weakness can support demand for safety, while resilient growth and persistent inflation keep pressure on policy-sensitive rates.

October’s jobs report pointed to a more resilient labor market than expected, with nonfarm payrolls rising 165,000 against a consensus forecast of 65,000. Upward revisions added another 84,000 jobs to August and September, lifting those gains to 186,000 and 60,000, respectively. The three-month average consequently stood at approximately 137,000, suggesting firmer recent hiring than earlier estimates indicated. The unemployment rate edged down to 4.1% from 4.2%, remaining within the narrow range prevailing since March. Hiring was concentrated in several industries rather than uniformly strong across the economy.

Interested in more futures markets?  Explore our Market Dashboards here.