Tech Stabilizes After Selloff

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 mixed. Technology is stabilizing after Thursday’s sharp selloff, but the recovery remains tentative as rising oil prices and uncertainty over AI investment keep investors cautious. Thursday’s losses were concentrated in technology: the Nasdaq Composite fell 2.6%, the semiconductor index dropped approximately 6% and the S&P 500 declined 1.21%. Most S&P constituents nevertheless advanced, underscoring the influence of large technology companies on index performance. Today’s weaker Dow futures suggest the earlier resilience outside technology is also being tested. Meta’s capital-expenditure plans renewed concern about debt-funded expansion, while Lam Research’s shipment-delay warning added pressure to semiconductor shares. Corporate credit spreads have also widened to their highest since May 2025, making financing conditions an additional constraint on the investment cycle. Next week’s Microsoft and Alphabet results will provide important evidence on AI revenue, capital spending and funding requirements.

CURRENCIES

US DOLLAR: The USD index is 0.13% higher at 101.78, recovering modestly against European currencies, while the yen is retaining most of its haven-driven gains. Today’s equity market dynamics weighed on the dollar while the rise in oil prices simultaneously supported it. Investors have sought the safety of US Treasuries amid the volatility in AI stocks recently, suggesting that equity sentiment and perceptions on the growth outlook for the AI space have an important bearing on the dollar. However, geopolitical support and rising oil prices have counterbalanced the downward pressure. Dollar dynamics are likely to be impacted by which of those dynamics is most forceful. Money markets currently assign a 11% probability of a hike this month and remained fully priced in for a hike by year-end.

EURO: The euro fell is little changed $1.1204. The euro remains vulnerable to France’s fiscal difficulties. Weaker euro-area activity adds to the pressure, although it does not necessarily signal a renewed downturn across the region. The composite PMI’s decline to a four-month low reflected renewed French contraction and softer German growth;. France remains the principal drag, while the rest of the region is more resilient. As for the ECB, money markets continue to expect no policy action this month, while pricing an 67% chance of a hike in December. The market is also priced for 65 bps of tightening over the next 12 months.

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 fell 0.19% against the dollar to $1.3373. Sterling continues to outperform the euro despite mixed UK data. EUR/GBP reached 0.8362, its lowest since May 2025, putting the pound on course for a fourth consecutive weekly gain against the single currency. The UK composite PMI rose to 53.1 from 52.0, but weaker retail sales and consumer confidence suggest households are beginning to feel the cumulative strain from energy costs and borrowing rates. Nevertheless, money markets still expect tightening from the Bank of England as early as the next meeting in November following this week’s inflation and labor data, which showed Headline CPI rise 3.5% y/y from 3.1% y/y while annual weekly earnings growth excluding bonuses rose to 3.7% y/y. Taken together, the figures suggest labor market conditions alone may not be enough to bring inflation under control. However, while the reports make the case for a November move the reality of an aggressive sequence thereafter appears unlikely.

JAPANESE YEN: The yen is little change at 156.73 yen per dollar. The yen’s strength appears more closely tied to hedging demand than repatriation. Strategists cited by Reuters found no evidence that Japanese institutions were bringing overseas funds home. September core inflation above the BOJ’s 2% target supports the case for further normalization, but the majority of Reuters-polled economists expect unchanged policy next week followed by 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 little changed at $0.7023. The global rout in risk assets recently has weighed on the currency, though it has remained modestly resilient, thanks to expectations that the RBA may still hike once more before year-end. Currently, money market expectations of a November hike are at 61%. However, these expectations could be overdone, especially following recent labor data, which showed a drop in employment, which could give the RBA some confidence that policy settings are adequately restrictive.

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

TREASURY FUTURES

Yields moved modestly higher across the curve. The scale of Thursday’s move highlights the shift in market priorities. Defensive demand during the technology selloff outweighed the immediate inflation implications of rising oil. The 10-year real yield fell 12 bps to 2.64%, while its breakeven declined 5 bps to 2.32%. At five years, the real yield fell 22 bps but the breakeven rose 5 bps to 2.45%. Real yields therefore drove much of the rally, while shorter-horizon inflation compensation increased alongside oil. Markets continue to favor an October hold while retaining substantial expectations of a December hike. The October 27–28 FOMC meeting will test whether policymakers view the recent financial-market adjustment as sufficient reason to wait, or merely as a pause within a continuing tightening cycle.

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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