Tech Selloff Continues

MACRO FRAME

AI volatility weighs on the indexes as investors continue to weigh moderating inflation trends against still-resilient growth data. Equity performance alongside elevated Treasury yields suggests expectations remain centered on a gradual labor market slowdown rather than a sharp deterioration. ISM PMI data revealed positive momentum in the services and manufacturing sectors alongside persistent price pressures.

STOCK INDEX FUTURES

Equity indexes are lower as investors weigh steady macroeconomic data against renewed volatility in technology and AI-linked names. The latest ISM Services PMI held at 53.8 in January, slightly above expectations, pointing to continued expansion in the services sector. Business activity strengthened, though new orders and employment softened modestly, while the prices component moved higher, suggesting that inflation pressures in services may not be easing as quickly as anticipated. Taken alongside the recent rebound in manufacturing activity, the data continues to support a growth backdrop that has surprised to the upside.

The equal-weight S&P traded firmer on Wednesday, reflecting the concentration of losses in large-cap technology names. Recent selling has been reflective a rotation rather than broad equity weakness. Much of the recent volatility has been concentrated in sectors tied to AI and enterprise software, where investors are reassessing the potential pace and scale of disruption from new AI tools.

Recent price action suggests markets are reacting quickly to headline risk as questions emerge about how far large language models could extend into established business applications. While the selloff appears driven by short-term positioning and portfolio hedging, broader adoption timelines remain uncertain, and several industry leaders have emphasized that replacement of core enterprise software is far from immediate. The dynamic has led to sharper intraday swings, with sentiment often shifting faster than underlying fundamentals.

Watch point: Continued “shoot-first, ask-questions-later” reactions to AI headlines could amplify short-term volatility. A more durable shift would likely require soured earnings or a meaningful tightening in financial conditions rather than isolated technology-sector moves.

CURRENCY FUTURES

US DOLLAR: The dollar is higher as traders turn risk-averse amid volatility in the equity and precious metals markets, but trimmed earlier gains following the release of weekly initial jobless claims figures. The dollar is likely to remain range-bound as markets await confirmation of labor market themes after services sector PMI data was friendly to dollar strength. While rate-cut expectations have drifted marginally later in the year, the lack of follow-through in either direction suggests conviction is low rather than consensus strong. Dollar performance currently reflects a balance between relative growth resilience and stable financial conditions rather than outright policy divergence.

Watch point: An upside surprise in labor data could likely reinforce dollar support.

EURO: The euro is little changed as the European Central Bank held rates as expected, described growth as resilient but uncertain, maintained data-dependent guidance, and continued passive balance sheet tightening, signaling no urgency to ease but preserving flexibility. Solid private sector data, low unemployment, and previous reductions to monetary policy are all favorable to underpin growth, while inflation remains stable in the region. Broadly, the euro draws structural support from capital flows and relative equity performance despite a neutral policy outlook. Markets appear comfortable with the ECB maintaining a patient stance, though sustained appreciation above the $1.20 level would likely prompt more dovish policy rhetoric from ECB officials.

Inflation the eurozone eased to 1.7% year-over-year in January, a drop from 2.0% in December and in line with forecasts. A stronger euro and falls in services and energy prices led prices to fall 0.5% during the month. Core inflation fell to its lowest level since October 2021 at 2.2%.

Watch point: A break above $1.20 could materially raise expectations of verbal or policy intervention from ECB officials.

BRITISH POUND: Sterling is weaker following an unexpectedly narrow 5-4 vote to hold rates steady, which signaled that further policy easing is ahead. Easing wage growth and a looser labor market have contributed to deflationary trends in recent data and have made the risk of greater inflation persistence less-pronounced. The narrow vote suggests that many policymakers are comfortable with an immediate reduction in policy, and any upcoming data that confirms those conditions is likely to tip the scales at the next policy meeting. Policymakers at the Bank of England expect CPI to return to target by Q3 2026, a much earlier timeline than November’s forecast of Q2 2027. Still, there are policymakers that are likely to want a confirmation that easing inflation is not a one-off in data but expectations of near-term easing are likely to grow if data is accommodative.

Watch point: Further evidence of wage deceleration could accelerate easing expectations and pressure GBP more than marginal CPI declines.

JAPANESE YEN: The yen’s weakness continues to reflect that fiscal and political expectations are outweighing policy cues from the Bank of Japan, signaling that tightening from the central bank will not do enough to prevent the currency’s drop. Lower house elections this weekend are likely to increase support for Prime Minister Takaichi’s plans of more fiscal stimulus and tax cuts. The yen has fallen roughly 3% against the dollar since hitting a three-month low of 152.1. Markets remain alert to the possibility of intervention rhetoric, though price action appears more sensitive to fiscal and monetary policy moves in the near term.

Watch point: A disorderly move beyond the 160 level could significantly raise intervention probabilities.

AUSTRALIAN DOLLAR: The Australian dollar is lower alongside a slide in precious metals prices but retains support from tightening bias expectations and firm domestic demand conditions. However, near-term price action depends less on local inflation prints and more on commodity prices and risk sentiment. The Reserve Bank of Australia delivered its first rate increase in two years earlier this week, raising the cash rate by 25 bps to 3.85%, while indicating uncertainty over whether current policy settings are sufficiently restrictive. Updated staff projections showed higher inflation forecasts for both this year and next, even while incorporating a technical assumption of additional tightening in 2026, a combination that suggests policy risks remain skewed modestly to the upside rather than fully neutral.

Recent inflation data continue to reflect persistent price pressures, with headline CPI rising to 3.8% year-over-year in December and trimmed mean inflation edging higher to 3.3%. Broader domestic indicators also point to financial conditions that may not yet be materially constraining demand, as solid consumer spending, elevated housing prices, and accessible credit conditions have supported activity.

Taken together, the backdrop implies that while the RBA is not signaling an imminent tightening cycle, it is also not prepared to declare policy sufficiently restrictive, leaving the currency and rate expectations sensitive to incoming inflation and consumption data.

Watch point: Evidence of sustained moderation in core inflation or a clearer slowdown in household demand could temper tightening expectations, while continued strength in price and spending data could keep policy bias firm.

INTEREST RATE MARKET FUTURES

Treasury yields are lower but remain range-bound ahead of key data, reflecting a market comfortable with delayed easing and not convinced of any hope for near-term easing. The curve continues to steepen modestly, indicating growth expectations remain intact even as inflation concerns persist. Weekly initial claims data was friendly to bond prices, with claims shooting to 231,000, breaking above the four-week MA of 212,500.

The ISM Services index held in expansion territory while its prices component moved higher, suggesting that inflation pressures in the services sector may not be easing as quickly as expected. Earlier in the week, manufacturing activity also returned to its strongest pace in over two years, while survey respondents noted they expect further price increases. The reading reinforces the view that growth conditions are stabilizing, while tariff-related price pressures continue to work through the economy. As for the Fed, the data does little to change the monetary policy outlook ahead of January’s labor report (Feb. 11). Policymakers are likely to look past tariff-induced inflation pressures and instead focus on structural inflationary concerns.

Watch point: An upside labor surprise could likely steepen the curve further, while a combination of softer employment data and easing services prices could push yields lower.

The spread between the two- and 10-year yields is 72.80 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.502%.

 

 

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