Stock Market Today: Tech Rebound, Bonds Slide on Fed Bets

The stock market today told two stories at once. Global stocks climbed on Wednesday as investor enthusiasm for the artificial intelligence trade outweighed concern that hotter-than-expected United States inflation will push the Federal Reserve to raise interest rates further. At the same time, bonds slumped around the world, with yields jumping as traders repriced the path of American interest rates. It was a split-screen session: equities looking past the inflation scare, and the bond market pricing it in.

Futures for the Nasdaq 100 rallied 1.5 percent in early trading, recouping the underlying index's loss from regular trading on Tuesday. Contracts for the S&P 500 and European equity-index futures both climbed 0.7 percent, and Asian stocks jumped 1.6 percent for a third straight day of gains, led by technology. There was no trading in cash Treasuries on Wednesday, with the United States closed for the Veterans Day holiday, but the sell-off in government bonds continued in Asia and Europe.

The trigger for the bond rout was the October inflation report, released on Tuesday. Consumer prices, excluding food and energy, rose 0.3 percent in October from a month earlier, topping estimates for a third straight month. Overall consumer prices increased 0.4 percent as the cost of essentials climbed across the board. The figures landed on a market already rattled by hawkish comments from Federal Reserve officials, and the reaction was swift: yields surged, the dollar firmed, and traders firmed up bets on a rate hike at the Fed's December meeting.

Tech Leads the Rebound as Asia Climbs

Asian markets carried the rally on Wednesday. The MSCI Asia Pacific Index advanced 1.6 percent after capping its best two-day performance in more than three months on Tuesday. Tech shares led the gains, extending a run now in its third straight session. Japan's Topix rose and the Shanghai Composite gained, while Hong Kong's Hang Seng fell 0.8 percent.

Futures pointed to further gains in the West. Nasdaq 100 futures rose 1.5 percent as of early London trading, S&P 500 futures rose 0.7 percent, Dow Jones Industrial Average futures rose 0.2 percent, and Euro Stoxx 50 futures climbed 0.7 percent. The pattern mirrored Tuesday's American session in reverse, suggesting investors outside the United States were willing to look through the price figures and focus on corporate earnings instead.

The earnings story that mattered most belonged to CoreWeave, the artificial intelligence computing provider. Its shares rose about 2 percent in late United States trading after the company reported quarterly earnings that topped analysts' estimates and boosted its annual forecast. The result helped sustain interest in the artificial intelligence trade, offsetting the Wall Street sell-off fueled by the hotter-than-expected inflation data, and gave buyers the reassurance they wanted after weeks of questioning whether the AI boom can keep justifying its valuations.

Hot October Inflation Data Shocks Traders

The October consumer price report was the day's defining number, and it was worse than Wall Street had expected on almost every measure. The Bureau of Labor Statistics data showed core consumer prices, which strip out volatile food and energy costs, rising 0.3 percent in October from September. Economists had forecast a 0.2 percent increase. It was the third month in a row that the core reading had come in above estimates, a run that has eroded confidence inflation is on a smooth path back to the Federal Reserve's 2 percent target.

The headline figure told the same story. Overall consumer prices jumped 0.4 percent in October, against a forecast of 0.3 percent, as the cost of essentials climbed across the board. Price pressures spread beyond the categories that had driven earlier increases. That breadth is what alarmed traders: a narrow, one-off jump can be dismissed, but a broad-based rise in the cost of living is much harder for a central bank to ignore.

Federal Reserve officials responded within hours. Before the data landed, Fed Governor Christopher Waller had said in London that a core reading of 0.3 percent would prompt him to consider a half-point December hike, and the data came in at exactly that level. Dallas Fed President Lorie Logan then said more rapid rate hikes may be needed this winter to calm inflation, Chicago Fed President Austan Goolsbee warned of a "real inflation issue," and Philadelphia Fed President Anna Paulson called for gradual rate hikes. The chorus from inside the central bank was unmistakable: the fight against inflation is not over.

Federal Reserve Officials Turn Hawkish

The market's repricing after the inflation data was fast and decisive. Money markets moved to price in a Federal Reserve rate hike at the December meeting, a quarter-point move now seen as essentially locked in, with some chance of a larger one. Fed funds futures implied about a 10 percent probability of a 50-basis-point rise in December, up from almost nothing before the data, and three quarter-point moves fully priced in by the middle of next year. The federal funds rate sits at 3.75 to 4.00 percent, and traders now bet it will reach at least 4.00 to 4.25 percent after the December 8 and 9 meeting.

The shift is a sharp reversal from the mood of only a few weeks ago. Through much of the autumn, investors had debated when the Fed might start cutting rates. The October report, following two earlier months of upside surprises in core prices, has flipped that conversation on its head. Instead of asking when easing might begin, traders now ask how much tightening is still to come, and whether December brings a quarter point or a half point.

Treasury Yields Jump as Bonds Sell Off

The bond market's reaction to the inflation report was dramatic. Treasury two-year yields jumped 17 basis points on Tuesday, the most in 19 months, to around 4.73 percent, and some measures put the move at 18 basis points to 4.736 percent. The ten-year yield rose more than 12 basis points to just under 5 percent. The move in the two-year note, the most sensitive to Fed policy expectations, showed how completely traders had rewritten their view of the rate path in a single session.

The sell-off spread across the globe on Wednesday. Yields on benchmark government bonds in Japan and Australia jumped at least six basis points each, tracking Tuesday's sell-off in Treasuries. Japan's ten-year yield advanced 11 basis points to 2.79 percent, and Australia's ten-year yield advanced six basis points to 5.04 percent. In Europe, Germany's ten-year yield rose six basis points to 3.32 percent, and Britain's rose nine basis points to 5.22 percent.

The move in yields matters far beyond the bond market. Higher Treasury yields raise borrowing costs across the economy, from mortgages to corporate debt, and raise the bar for stocks by offering investors a better return from government paper. A ten-year yield near 5 percent changes the arithmetic of every valuation built on cheap money, and the global rout left no doubt about the direction of travel when cash Treasuries reopen after Veterans Day.

Wall Street's Tuesday Sell-Off in Context

The American session on Tuesday showed what the inflation data meant for stocks in the short term. The S&P 500 fell 0.4 percent to 7,520.93, snapping back-to-back gains, the Dow Jones Industrial Average fell 0.3 percent to 52,231.89, and the Nasdaq Composite dropped 0.7 percent to 25,065.87. The declines were broad but orderly, a repricing rather than a panic, as investors adjusted to a Fed more likely to hike than to cut.

Behind the daily swings, professional investors have been pulling back. Global equity hedge funds cut risk at the steepest rate in more than a decade through the first week of November, as a widespread unwind gathered steam, according to a note from Morgan Stanley prime brokers on Tuesday. The de-risking suggests the market's biggest players are not waiting for the December Fed meeting, and that Wednesday's rally in Asian and European stocks is being driven more by dip buyers than by large institutional money returning in force.

AI Trade Tested: CoreWeave, Nvidia, SoftBank

The artificial intelligence trade, the engine of the stock market's gains for much of the past two years, faced a stern test on both sides of the ledger this week. CoreWeave's earnings beat showed the demand side of the AI story is still strong, with companies continuing to spend heavily on computing power. But two of the biggest names in the sector delivered the opposite message, and their declines weighed on the Nasdaq on Tuesday.

Nvidia remained at the centre of a political storm as the company probes whether chief executive Jensen Huang was targeted by a foreign intelligence operation. Its shares slid 5.5 percent overnight, taking losses from their recent peak to around 30 percent. The drop made Nvidia one of the biggest drags on the Nasdaq, and showed how exposed the market's most important stock has become to headlines unrelated to its earnings or products.

SoftBank Group slid 3.3 percent after reporting a net loss of 7 billion dollars in the second quarter, hit hard by hefty buildout costs for United States data centres. The loss included a 3.7 billion dollar writedown on its data-centre projects, and the shares fell as much as 11 percent in Tokyo trading at one point. The result was a reminder that the AI infrastructure boom is expensive as well as lucrative, and that even its biggest backers are feeling the cost of building the data centres that power it.

The tension between CoreWeave's beat and the troubles at Nvidia and SoftBank captures the market's dilemma. Demand for AI computing is real and still growing, but the stocks that embody the trade have risen so far, so fast, that any hint of trouble can trigger a sharp fall. Wednesday's rebound in Nasdaq futures suggests buyers are still willing to step in, but Nvidia's 30 percent drawdown from its peak shows how quickly sentiment can turn.

What Happens Next

The calendar now points to the Federal Reserve's December meeting on December 8 and 9 as the next decisive moment. Between now and then, traders will watch every inflation and jobs release for signs of whether the October surprise was a blip or a new trend. Another upside surprise would strengthen the case for the half-point hike Waller put on the table, while a softer reading could let the Fed settle for a quarter point.

The bond market's reopening after Veterans Day will test whether the global yield surge has further to run. A ten-year Treasury yield at or above 5 percent would be a psychological line for equity investors, and a break through it could trigger fresh selling in the most richly valued parts of the market. For now, the stock market today is betting technology earnings can outrun higher rates.

Source: Bloomberg