Tech Leads Gains in Rebound

MACRO FRAME

With global monetary policy skewing toward a renewed tightening cycle, US-China talks take center stage as markets navigate elevated oil prices.

STOCK INDEX FUTURES

Equity index futures rebounded overnight as  renewed enthusiasm around AI offsets some of the macro headwinds from Brent above $100, a 10-year Treasury yield near 5.1%, and rising expectations of another Fed rate hike. The Nasdaq’s outperformance shows that investors are again adding exposure to large-cap technology, semiconductors, and AI infrastructure even after Thursday’s rate-driven selloff. The rebound reflects an increase in risk appetite, though not all bond-market and oil-price concerns have disappeared. For the chip complex, investors view the AI capex cycle as sufficiently powerful to support earnings despite higher discount rates. That said, this makes valuations increasingly dependent on continued proof that AI spending is translating into durable revenues, utilization, and margins.

A report that US and Iranian negotiators are exploring a phased route out of the conflict improved market sentiment. The proposal reportedly involves Iran reopening the Strait of Hormuz in return for Washington lifting its economic blockade of Iran. Reuters described Iran’s reopening of the waterway and US sanctions relief as the potential first stage of a broader deal, although the parties remain reluctant to surrender their negotiating leverage. Fed expectations remain hawkish. Markets assigned a 69% probability of an October hike, up from around 50% earlier in the week. The repricing reflects both strong US activity and a more persistent energy-driven inflation concern.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index fell 0.30% overnight to 100.99, following moves in oil. The dollar is still finding underlying support from markets aggressively repriced US interest rate expectations, though its recent move upwards had become a bit overstretched. Strong economic data, renewed energy concerns, and a number of hawkish Fed speakers have also underpinned near-term rate hike expectations. Money markets are priced for 37 bps of tightening by year-end, but have notably shifted odds of an October hike to 69% from 50% following the release of September’s strong PMI data.

Watch point: A reduction in tightening expectations for the Fed will act as the greatest risk to the dollar maintain its move above the 100 level.

EURO: The euro rose 0.21% to $1.1403. While recent dollar strength has outshined the euro, the currency has experienced a raft of data and language from policymakers very similar to the Fed. Comments from ECB officials have been hawkish, supporting prospects for a potential October rate hike, which is priced at 50%, while markets are fully priced for a hike in December. Money markets roughly expect the ECB to hike as much as the Fed in the next 12 months, pricing in around 93 bps of tightening. French, German, and Eurozone PMI data released on Wednesday revealed an upside surprise in activity with renewed price pressure, both of which make it harder for the ECB to rule out another hike. This sets up the euro to gain strongly against the dollar if Fed hike expectations fall, or if an October rate hike fails to materialize. On the data front, German consumer sentiment fell sharper than expected, with households reporting that higher energy prices will weigh on income expectations.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which has been favorable to the dollar in advent of a hawkish repricing in Fed policy expectations the near-term.

BRITISH POUND: Sterling is 0.29% higher at $1.3254. Money markets are priced for nearly four rate hikes over the next 12 months from the Bank of England, and see a roughly 80% chance of a move in November. However, that pricing appears at odds with current economic conditions in the country, which will limit the central bank from tightening rates as aggressively as markets expect. Some of this strong pricing is thanks to recent commentary from BoE officials, who have sounded hawkish in their remarks. Deputy Governor Breeden said it could become “increasingly appropriate” to respond to inflation by raising interest rates. Deputy Governor Lombardelli said rates may need to rise if energy prices remain elevated, while member Dhingra, a more dovish policymaker, said inflation expectations were not yet a source of concern.

JAPANESE YEN: The yen is 0.88% stronger at 157.80 yen per dollar. Reuters is reporting that President Trump raised concerns about the yen’s weakness with Prime Minister Takaichi, per Japan’s Finance Minister Katayama. The comments are unusual, signaling shared concern in Tokyo and Washington over yen weakness, leading markets to position for another potential round of intervention. However, sentiment regarding the currency has been damaged after the BOJ underwhelmed the investors following its divided decision to raise rates and Governor Ueda’s unconvincing press conference.

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 0.26% higher at $0.7027, still near its lowest level since early-August. Despite dollar strength, the hawkish outlook for the Reserve Bank of Australia is offering the currency support to remain above $0.70. Australian labor data showed the economy added 39,500 jobs in August, well above forecasts for a gain of 20,000. The unemployment rate edged higher to 4.6%, a five-year high as more people entered the labor force. RBA Governor Michele Bullock has recently said that unemployment between 4.5% and 5.0% is needed to help loosen the labor market inflationary pressures. Still, inflation pressures extend well beyond the labor market. Markets imply a 100% chance the RBA will raise rates to 4.60% when it meets next week. The Commonwealth Bank of Australia and ANZ joined the other two Big Four Australian banks in expecting a rate hike this year. ANZ is also expecting an additional move to 4.85% in November. Q3 inflation figures will continue to serve an outsized role in determining RBA policy and given that the September policy meeting is a month before the release, policymakers could wait until that data arrives before making any decisions.

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 lower at the front end and higher at the long end as a decline in oil prices and hopes that the US and Iran may come to a phased agreement to reopen the Strait of Hormuz, provided some relief. Despite the modest pullback in yields the story for the bond market remains little changed. Borrowing costs remain at 2007 highs, and expectations that the Fed will tighten policy further have seen the front-end rise strongly. The move is not solely a policy-rate story: while short maturities mainly reflect the expected Fed path, the 30-year yield embeds the compensation investors require for inflation uncertainty, heavy future Treasury supply, and the risk of holding duration over a much longer horizon. Thus far, markets have absorbed the rise in yields because nominal growth, corporate profits, and AI-related investment remain robust. Evidence of weak Treasury-auction demand, deteriorating market liquidity, a sharper rise in mortgage spreads, or further acceleration in inflation expectations would signal that risk is becoming more material. Recent comments from several Fed officials have also been hawkish, while PMI data pointed to continued strength in US economic activity.

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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