AI enthusiasm faded quickly last week amid softer results from Amazon and Alphabet.
This helped drive a sharp reduction in bond yields. The US 10-year yield fell 9 basis points (bps) to 4.91% and is on track for one of its largest monthly falls in nearly three years, as the tech sell-off sent investors scrambling for the safety of Treasuries.
The US Federal Reserve held rates steady, while Australian CPI data pointed to a likely RBA hike on Melbourne Cup Day.
Oil was steady (Brent crude +0.8% to US$117.64) while gold (-2.6%) fell to a 12-month low and Bitcoin (-5.2%) fell on cyber security fears.
The S&P 500 fell 0.6% while the S&P/ASX 300 gained 1.4%.
In the local market, long-duration heavy-capex stocks weakened, and China-related concerns weighed on commodities.
Markets now await the US midterms and a possible resumption of conflict in the Middle East.
Interest rates and outlook
The Fed, European Central Bank (ECB) and Bank of Japan (BoJ) each met last week and kept rates steady as expected.
- The Fed held at 3.75-4.00% in a 10-2 vote, with two members favouring a 25bp hike.
- The ECB held at 2.5%, warning that energy costs leave December’s meeting as a live decision. Christine Lagarde confirmed her February departure as President.
- The BoJ hold likewise offered little comfort on inflation.
- The Reserve Bank of New Zealand surprisingly also paused, despite very clear expectations for a rate hike.
A December hike is a live option for most, if not all, of these central banks – so it was a pause in the rate hike cycle, rather than the all-clear.
The Bank of Canada (BoC) was the odd one out, hiking 25bps to 2.5%, as expected. This was its first increase since July 2023, to stop high energy prices spilling into broader inflation. BoC Governor Tiff Macklem flagged that further hikes may be needed but said they will proceed carefully; the next decision is on 9th December.
The Fed’s statement kept its tightening bias, while Chair Kevin Warsh’s press conference leant modestly dovish, indicating that September’s hike was filtering through financial and credit conditions, and the next intermeeting period would bring more data.
He stressed that the pause neither softened the inflation target nor promised another hold.
Markets are pricing roughly 71% odds of a December hike and just 58bps of tightening over the next year.
Warsh’s line about tighter interest rates getting “in the cracks” of the economy signals a Fed in wait-and-assess mode, not one that is done.
December remains very much live, but the Fed wants more data before it moves – potentially a tacit admission it doesn’t like what it is seeing – so the call hinges on whether the numbers turn after the US midterms.
Traders also note there were only two dissenters, which suggests the hawkish camp is narrower than feared and that December will be decided by the data, not by a hawkish revolt on the Committee.
Macro and policy Australia
Inflation remains stubbornly high.
Last week’s consumer price index (CPI) showed headline inflation jumping from 4.0% in August to 4.3% in September, while the trimmed mean edged up to 3.6% and its six-month annualised pace hit 4.0%, the fastest in the short history of the series.
The quarterly trimmed mean rose 1.0%, ahead of the RBA’s 0.8% forecast.
That leaves the RBA odds-on to lift the cash rate to 4.85% on Melbourne Cup Day, an 18-year high. Markets are pricing an ~81% chance of a hike, and 25 of 28 surveyed economists, including all of the big four banks, agree.
The hike could come with hawkish guidance, as sticky services inflation, higher oil and the RBA’s view that the labour market is tighter than it had judged push its inflation forecasts higher.
The peak for this cycle is drawing closer, but the market needs clear evidence of slowing in the official data – especially building approvals, household spending and job vacancies – before calling a top.
Yet while inflation is running hot, the housing market is cooling quickly.
Prices are already correcting as higher rates bite – and falling house prices are a reliable dampener on household confidence.
With October trading updates from JB Hi-Fi, Bunnings and Coles already pointing to softer spending, the housing slowdown should weigh on activity and do some of the RBA’s heavy lifting for it.
Macro and policy US
Headline personal consumption expenditures (PCE) inflation accelerated to 3.6% year/year in September.
Core PCE – traditionally the Fed’s favoured measure – rose 0.32% month/month (consensus 0.3%), lifting the annual rate from 3.01% to 3.12%.
The markets see room for two more Fed hikes by next September.
Q3 real GDP grew 3.4% annualised, ahead of the 3.2% consensus and the fastest pace in a year. Strong consumption did most of the work, with AI-led equipment investment also a key driver.
However, momentum faded late in the quarter, with the monthly personal income report showing real spending flat month/month in September.
The US consumer has split in two, and housing-linked demand is rolling over. Earnings results last week painted a K-shaped consumer under affordability strain.
UPS, for example, called out the “K curve” in spending directly and a payments network said its highest-spending cohort is still growing fastest.
October’s confidence gains were confined to households earning US$100,000+. Further down the ladder, the signs are weaker: Hershey trimmed its sales outlook to the bottom of its range as stretched households tightened their belts, and Nielsen IQ had Halloween candy sales down 6.7% in the month to 17th October.
Housing and repair/remodel remain the economy’s soft underbelly.
This can be seen in appliance manufacturer Whirlpool cutting guidance for the third time this year on soft North American volumes, while among homebuilders D.R. Horton guided for lower revenues.
The upshot is the top end of town is propping up the aggregate numbers, while everyone else trades down and rate-sensitive categories do it tough.
The market is positioned for a Democratic sweep in the Midterm elections. Polls favour Democrats in both chambers, and sentiment largely reflects it.
Two outcomes matter;
- If Republicans hold the Senate, with key races inside the margin of error, that’s a tailwind for equities into year-end.
- If Democrats win a bigger Senate majority than expected, perhaps 53+, 2028 worries and the prospect of higher corporate taxes could add incremental pressure on valuations.
Markets are bracing for renewed US strikes on Iran once the midterms are out of the way, but diplomacy is still in play.
The US has reportedly told several Gulf states to prepare for a short, intense campaign after the election, with strike options being readied.
The diplomatic push has picked up in parallel: Saudi, Turkish and Pakistani delegations met Iran’s leaders in Tehran early in the week, Qatar tabled a new seven-day framework, US Vice President JD Vance reportedly wrote to Iran’s leadership, and Semafor reports talks towards a temporary peace deal. Tehran insists its conditions be met first.
With Brent already pushing towards US$118/bbl, the risk for equities is a short, sharp energy shock, or any disruption to flows through Hormuz, reigniting inflation fears.
AI and technology
The AI trade rolls on, but where the spoils land is getting harder to pick, and even early movers like Google are feeling the heat.
The question is not demand, but returns on investment. In the current US earnings season, markets are increasingly focused on returns and cash generation
The cloud businesses for hyperscalers Microsoft, Alphabet and Amazon continue to surge with demand reportedly outstripping capacity.
- Microsoft’s Azure grew 48% and is guided to accelerate to 49–50%, with commercial remaining performance obligations (RPOs – essentially the backlog) up 73% to US$677 billion.
- Google Cloud more than doubled, up 103% to US$30.7 billion, on a US$561 billion backlog.
- Amazon’s AWS grew 39% to US$46 billion, its fastest in 19 quarters, with a US$578 billion backlog and 40%+ growth pencilled in for both 2027 and 2028.
Updates from Asia reinforced the demand story, as Korea’s SK Hynix reported a more than seven-fold rise in quarterly operating profit, with high bandwidth memory (HBM) and dynamic random-access memory (DRAM) capacity sold out through 2029.
HBM demand is running at twice available supply, lifting Korean semiconductor stocks and the KOSPI (+3.3%).
However, the hyperscaler core businesses told a softer story.
- Alphabet’s search advertisement growth was its slowest in five quarters, falling to +12% from +17% in Q2, missing the +15% consensus. Management blamed FX, tough comps, softer retail and media spending, and weaker monetisation of AI Mode queries, conceding they monetise at a lower rate. So far AI has driven genuine incremental growth rather than cannibalising existing businesses, but this print has put the cannibalisation worry back on the table.
- Amazon online stores grew just 2% and the ad business 11%, its slowest on record, with advertising revenue missing by about 6%. The retail businesses also came in light, though a Prime Day timing shift didn’t help.
Meta, by contrast, has moved more aggressively to weave AI into its advertising business, driving stronger engagement and revenue growth. Its ad revenue is now approaching Google’s, and some analysts expect it to overtake Google globally by the end of 2026.
Ad growth remains strong by historical standards, but the slowdown at Google and Amazon has sharpened investor focus on the profitability of AI investment and the importance of keeping ad revenues ticking over.
The net effect was a sharp reversal in stock prices.
- Alphabet suffered a record fall, wiping out nearly US$500 billion as US$9.1 billion of cash burn compounded the search miss.
- Amazon slid on Friday (-5% on the week) as AWS fell short of elevated expectations and US$77 billion of quarterly capex left a US$42.4 billion trailing-12-month free cash outflow.
- Meta is down 10% since reporting, and even Microsoft gave back its post-result pop.
Oracle’s Investor Day initially eased funding concerns, noting customer-provided hardware, prepayments and vendor financing are reducing upfront capital needs. They are expecting free cash flow to turn positive in 2H28 and reach US$30 billion+ in FY29, and incremental capital raises are capped at US$20 billion through FY30.
The rally soon reversed, though, suggesting financing is only part of the equation.
The pain ultimately spread well beyond the hyperscalers. Intel fell sharply on memory costs and weak PCs while ServiceNow dropped 27% on a softer RPO guidance.
The upshot seems to be that AI demand and adoption are not in question, but any slip in the core business gets punished, given lofty expectations.
AI-related capex also remains in focus. Alphabet (US$195–205 billion) and Amazon (~US$220 billion) held capex guidance, and Microsoft’s trim to ~US$170 billion was down to third-party delays.
All three flagged more to come in 2027 and, in combination with Meta, are tracking towards roughly US$750 billion this year.
The market saw this as a disciplined approach to capex and the AI-hardware related stocks were firmer over the week.
Funding worries remain. In the past few weeks Meta has raised US$37.5 billion of equity, with up to US$60 billion more planned for 2027.
SpaceX lined up a US$40 billion GPU lease, Broadcom a US$63 billion custom-chip special purpose vehicle, and Anthropic is proposing to raise $100 billion in cash.
At this point, we continue to see three key risks to the rollout of AI:
- Financial: the late-1990s internet boom showed that transformative technology can still fuel bubbles and misallocated capital, and higher bond yields have sharpened scrutiny of capex, despite some relief from the recent flight to quality.
- Political: in the US, fewer than 30% of people support the current pace of deployment, citing power grids, electricity bills and jobs. The president remains firmly behind the rollout, but the rest of the body politic is more cautious. Policy could turn less supportive after the midterms, and more so if a Democrat wins in 2028.
- Cyber: AI-powered attacks or a model malfunction in a critical function could raise defence costs, fuel the political backlash and trigger tougher regulation. The road ahead may be bumpier than markets are pricing.
Markets
Bond yields
Since the Iran conflict erupted, longer-dated sovereign yields have come under sustained pressure globally. Ten-year yields are up 175bps in France, more than 100bps in the US and the UK, and 75bps in Japan, Germany and Canada.
However, this has reversed recently. Yields have fallen even as oil has risen, and the stock-bond correlation has turned negative amid the tech sell-off.
If volatility in equities and credit persists, the flight-to-quality bid could hold up in the near term.
US earnings
Earnings growth in the “S&P 493” is on pace to beat the Mag 7 for the first time since ChatGPT kicked off the AI boom, reflecting a strong US economy driven by onshoring/manufacturing and a firmer consumer.
Australian equities
Banking system data for September showed mortgage growth is soft but stable at ~3% (one-month annualised) as weaker investor lending is offset by a partial owner-occupier recovery.
Banks are hoping this marks the lows, but renewed rate hikes will likely hurt the Spring selling season.
Business credit remains strong at +15% (one-month) and +10% (three-month) annualised.
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