Key Points
- Headline CPI increased to 3.7% for the 12 months to September, up from 3.4% in August.
- Energy prices rose 20.4% year-on-year, signaling stronger inflation ahead.
- Financial markets now expect at least a 25-basis-point rate hike in December.
- Investors reacted to the threat of higher interest rates slowing the AI rollout, with the Philadelphia Semiconductor Index falling more than 4%, and South Korea’s KOSPI index shedding more than 8.0% in Thursday trading.
- The IMF’s quarterly Financial Stability Report this week also highlighted the potential for market turmoil, citing a correction in AI-related asset prices, rising sovereign debt yields, and the impact of AI frontier models on cybersecurity as key risks.
The headline consumer price index increased to 3.7% for the 12 months to September, up from 3.4% in August. Core CPI (excluding food and energy) increased to 2.6% from 2.4% in August.
Energy prices climbed 20.4% (right-hand scale below) over the 12 months, warning of a sharp rise in CPI that tends to follow with a 1- to 2-month lag, as in 2021-2023 below.
Gasoline prices remain high, at $4.33 per gallon on October 12.
Diesel eased slightly to $6.18 per gallon on measures to ease the shortage ahead of the November midterms. However, reserve releases aren’t a long-term solution, and the Persian Gulf conflict will likely drag on into next year.
Financial Markets
Several Fed speakers have hinted that the Fed won’t raise rates at the October (27-28) FOMC meeting, but will hike again in December (8-9). The 2-year Treasury yield jumped to 4.95% after Thursday’s CPI report but has since settled at 4.70%. That is still 70 basis points above the Fed’s current target range of 3.75%-4.00%, implying at least 3 more 25-bps hikes.
High-yield bond spreads have jumped more than 2.0% since Kevin Warsh’s keynote address at Jackson Hole on August 28, to above 12%. Widening spreads warn of likely distress among small- and mid-cap borrowers when their current debt matures and they must roll it over at much higher rates.
Stocks
The Russell 2000 Small Caps ETF (IWM)2 is testing secondary support at 270 on the weekly chart below, while declining Trend Index peaks signal selling pressure. A breach of 270 would indicate a correction to test primary support at 240.
The S&P 500 remains in an uptrend, but retreated 1.1%, its largest daily loss since July, as the Philadelphia Semiconductor Index fell more than 4%.
A breach of primary support at 11,000 in the Philadelphia Semiconductor Index (SOX) would be a strong bear signal for stocks.
Asian Stocks
South Korea’s KOSPI index fell more than 8.0% in Thursday trading.
A sell-off in global technology hardware stocks deepened Thursday, with Asian chipmakers tracking Wall Street losses as concerns over further Federal Reserve interest rate hikes, financing of artificial intelligence investments weigh on sentiment.
South Korean chip giant SK Hynix plunged over 10%, while rival Samsung Electronics fell 7.1%.
In Japan, technology investment giant SoftBank Group tumbled 7.9%. Semiconductor testing equipment maker Advantest dropped 6.9%, while chipmaking equipment supplier Tokyo Electron lost 5.4%.
….The declines come as investors grow increasingly concerned that higher borrowing costs could weigh on the massive capital spending required to build out AI infrastructure, putting pressure on technology companies that have benefited from the AI investment boom.
Chief executives of Broadcom and Intel warned on Monday that financing could become a major headwind to the AI boom, with Broadcom’s Hock Tan saying it could be bigger challenge to AI expansion than shortages of chips or electricity. (CNBC)
Treasury Market
10-year Treasury futures caught a bid, with yields falling to 5.10% from 5.30% earlier in the month as funds increasingly flow from equities to bonds.
The IMF earlier warned in its quarterly Financial Stability Report of the potential for market turmoil, citing three salient risks that could be near-term catalysts for a sharp tightening of financial conditions:
First, although core firms in the AI ecosystem have been profitable so far—easing pressure on AI-related equity valuations—weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements.
Second, resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil given the foundational importance of sovereign bonds. High public debt and rollover risks remain unresolved, increasing the chances that a rise in yields could occur in a disorderly manner, despite stable bond market liquidity and the recent unwinding of some leveraged trades.
Third, cyber threats constitute a growing systemic risk as financial services become more digital and interconnected. For their part, frontier AI models are emerging as both powerful enablers of cyberattacks and critical defensive tools. These risks by themselves do not necessarily threaten financial stability, but they could become a systemic risk—impairments to key financial intermediation and credit provision, with serious negative economic effects—if they are amplified by financial vulnerabilities.
The report also highlighted hedge funds’ highly leveraged repo positions and pursuit of crowded trades that “could amplify market stress, with spillovers to prime brokers and broader financial markets”.
Dollar & Gold
The Dollar has strengthened on the prospect of higher interest rates, with the Dollar Index testing resistance at 103 before retracing to test new support at 102.
Gold weakened on the prospect of higher interest rates and a stronger Dollar, and will likely test primary support at $4,000 per ounce.
Conclusion
Financial markets are unsettled by the threat of higher inflation driving up interest rates, which could interfere with funding of the AI data center rollout. Stocks are selling off as investors move into bonds, which has lowered the yield curve by roughly 20 basis points in a few days.
South Korea’s KOSPI and Japan’s Nikkei indices are falling, and a Philadelphia Semiconductor Index (SOX) breach of primary support at 11,000 would be a strong bear signal for US stocks.
A Bitcoin1 retreat below support at 80,000 would confirm a market shift to risk-off.
The last two weeks of October are typically a precarious time for stocks, as fund managers reposition after the end of the financial year. We advise stock traders to keep stops tight and investors to adopt a defensive stance by shedding more volatile assets.
Rising interest rates and a strengthening Dollar are bearish for Gold, which is expected to test primary support at $4,000 per ounce. However, the underlying forces driving higher rates—inflation, poor fiscal management, and bond market instability— are all bullish for Gold. We remain long-term bullish on Gold and view the current sell-off as an opportunity for steady accumulation.
Acknowledgments
- CoinDesk: Bitcoin
- Federal Reserve of St. Louis: FRED Data
- CNBC: 2-Year & 10-Year Treasury Yields
- IMF: October Financial Stability Report
- CNBC: SK Hynix shares plunge 10% amid Asia tech rout as Fed rate hike fears, AI funding worries mount
- Grant’s Daily: Boom Loop
- CBO: The Budget and Economic Outlook, 2026 to 2036
Notes
- Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
- We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
