Slower AI Infrastructure Buildout Ahead?

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 mixed overnight as the Nasdaq recovered some of its loses, the S&P was modestly higher, and the Dow was down sharply for a second day in a row. Thursday’s technology-led rout erased nearly $3 trillion in S&P 500 market value and pushed the Nasdaq into correction territory. Pre-payrolls Nvidia had rebounded approximately 4.5%, with AMD, Intel, Broadcom and Micron gaining between 4.6% and 8.2%. Data-center developers and AI-exposed power companies also recovered some of their losses. The rebound followed mounting concerns that opposition to data-center construction and greater scrutiny of AI could slow infrastructure spending. Qualcomm’s disappointing smartphone-chip results added to the pressure. Possible hedge-fund deleveraging and crowded-position unwinds amplified Thursday’s decline, although those explanations remain unconfirmed. The breadth of the selloff, including declines in defensive sectors, suggested that pressure extended beyond individual earnings disappointments.

Payrolls increased by 165,000, well above the 65,000 consensus estimate, while August and September gains were revised up by a combined 84,000. The unemployment rate edged down to 4.1%. Stronger hiring supports the growth outlook, but the 0.4% monthly increase in average hourly earnings could complicate hopes that market volatility alone will deter further Fed tightening.

CURRENCIES

US DOLLAR: The USD index is 0.64% higher at 102.204. The stronger-than-expected employment report provides a fundamental counterweight to expectations that tighter financial conditions will reduce the need for additional Fed tightening. Payroll growth of 165,000, substantial upward revisions and a 4.1% unemployment rate indicate that the labor market remains resilient. Monthly wage growth of 0.4% also leaves the report less reassuring for the inflation outlook, although annual earnings growth stood at 3.1%. Markets priced an 78% probability of a December increase, little changed from before the selloff.

EURO: The euro is 0.69% lower to $1.1142, pressured by a stronger dollar. Markets assign roughly a 61% probability to a December hike, even after euro-area inflation accelerated to 4% in October. French fiscal concerns remained a potential constraint, although the immediate bond-market response was more constructive. A strong French debt auction and improved risk appetite helped narrow the French–German 10-year yield spread to approximately 146 basis points. 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 fell 0.71% to $1.3354. The BoE’s increase to 4% and indications that further tightening may happen provide a domestic source of support. However, the immediate price action highlights sterling’s vulnerability to deteriorating global risk appetite, even when UK rate expectations remain supportive. 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 0.42% lower at 158.32 yen per dollar. Dollar demand and a modest recovery in US Treasury yields outweighed support from the broader risk-off backdrop. 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 down 1% to $0.6857, under pressure from a stronger dollar and lower risk appetite following Thursday’s selloff. The National Australia Bank reported a sharp drop in its annual profits, while a historical department store in Australia, David Jones, entered administration on Thursday 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. Money markets are currently pricing -22.5 bps of easing by year-end 2027.

TREASURY FUTURES

Yields rose across the curve in a flattening move following strong hiring data. 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. For the Fed, the combination of stronger payroll growth, upward revisions and a low unemployment rate provide little evidence of an immediate need to prioritize employment support.

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