Tech Sentiment Stabilizes

MACRO FRAME

September’s CPI and PPI data continue to fuel expectations of a new hiking cycle from the Fed, while higher interest rates are adding to stress in credit markets.

STOCK INDEX FUTURES

Equity index futures are higher as investors awaiting major technology earnings and Wednesday’s Fed decision. Anthropic’s IPO filing helped revive enthusiasm for the AI trade on Monday, but that momentum has moderated as attention returns to funding costs and investment returns. The earnings test is about cash flow, not simply cloud growth. Analysts expect Google Cloud revenue to rise 95.1%, AWS revenue to increase 38.2% and Azure to expand 47.7%. Alphabet and Amazon are also expected to report another quarter of cash burn, while Microsoft is projected to generate more than $8 billion in cash flow. These dynamics will be heavily scrutinized by investors as they assess whether expanding demand can fund infrastructure commitments without further weakening balance sheets or increasing reliance on external capital. Meta’s stronger-than-expected revenue and upbeat outlook failed to offset concern about increased spending last week. Alphabet, Microsoft and Amazon therefore need to demonstrate not only demand visibility, but also a credible path from investment to sustainable returns.

CURRENCIES

US DOLLAR: The USD index is 0.20% higher at 102.16. Stabilizing AI sentiment is helping the dollar ahead of big tech earnings, which like the Fed decision, will play a dominant role in price direction for the currency. Renewed weakness in AI-related assets could undermine confidence in US growth and encourage a less aggressive policy outlook. Strong earnings and persistent inflation, by contrast, would reinforce expectations that rates remain higher for longer. Focus at this week’s meeting will center around the composition of the votes on the FOMC for signals on how far the Fed could raise rates. There have been several officials who have suggested that their preferred path in policy would be patience at the October meeting, so a consensus 12-0 to hold should not be taken as a reluctance to hike again in the coming meetings.

EURO: The euro fell 0.19% to $1.1150. The ECB’s quarterly Bank Lending Survey showed that the effects of earlier tightening are becoming more visible, potentially reducing the need for additional increases further into next year if the trend persists. However, money market expectations are little changed: pricing a 70% chance of a hike in December and 67 bps of tightening over the next 12 months. The euro is on course to be October’s weakest developed-market currency, down approximately 1.5% against the dollar. While Moody’s decision to leave France’s rating unchanged has provided some relief, French fiscal difficulties and political uncertainty look set to persist ahead of next spring’s presidential election.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling is little changed against the dollar at $1.3325; EUR/GBP is near 0.8367, hitting its strongest level against the euro since May 2025.  Wednesday’s budget is expected to be relatively restrained, preserving the confidence that has helped UK assets outperform their French counterparts. The focus will be on fiscal headroom, the borrowing mix and whether the government’s plans appear deliverable. That leaves the risk that markets could react poorly if borrowing described as temporary is likely to persist, or if household support and business measure imply a less credible consolidation path.

JAPANESE YEN: The yen fell 0.20% to 157.80 yen per dollar. The corporate services-price gauge rose 3.7% y/y in September, while Finance Minister Satsuki Katayama warned that Japan was prepared to take decisive action in currency markets. The Bank of Japan is expected to hold rates steady this week, which should leave focus on its guidance on subsequent tightening. Strategists cited by Reuters found no evidence that Japanese institutions were bringing overseas funds home, yet. September core inflation above the BOJ’s 2% target supports the case for further normalization, while the majority of Reuters-polled economists expect a quarter-point increase in December.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie is up 0.23% to $0.7033. Quarterly inflation data out tomorrow will serve an outsized role in monetary policy expectations. Forecasts expect the trimmed mean measure of inflation to rise 1%, and annual rate to remain at 3.6%. RBA Governor Bullock and other officials will also appear before lawmakers on Wednesday.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

The curve continued to flatten ahead of Wednesday Fed decision. The 2/10 spread has nearly halved over the last 20 days, trading at 25.80 bps today, as the front-end remains priced for 2-3 rate hikes over the coming year, while traders have taken strong interest in duration amid volatility in the tech space. Strong tech earnings this week could see traders rotate back out of the longer-end. Strong cloud demand and continued investment would support the growth outlook, but prolonged cash burn and rising financing costs could constrain future long-term spending. Today’s $70 billion five-year auction at noon will test demand ahead of the Fed. The statement and press conference Wednesday will then establish how policymakers balance financial conditions against inflation, followed by Thursday’s GDP, PCE and seven-year auction.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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