by Gavyn Jensen-Schneider, Research Associate

The AI trade continues to push ahead, with AI-exposed industrial names the latest space to benefit. The S&P 500 finished the week up +1.15%, while the Nasdaq rose +0.64%. The 10-Year Treasury yield, an interest rate indicator, closed at 5.24%, down -3 basis points (bps) from last week. The 6-Month US Treasury, a favorite of our US Treasury strategy, closed at 4.33%, up +3 bps from last week.

Power producers and industrial conglomerates were given a boon this week when Constellation Energy signed a deal with Alphabet (Google’s parent company) to provide 3.59 gigawatts of nuclear power for AI and data center use. The megadeal has been interpreted as a sign that power- and compute-hungry companies like Google will take energy from any source, including up-and-coming energy producers. A number of “second-order beneficiaries” that provide parts for nuclear power plants and other critical AI infrastructure, such as Mirion Technologies (MIR), saw a bounce off this announcement as well. We continue to see the broad-based impact of AI as a tailwind for some otherwise sleepy industrial names.

Yields on the 10-Year Treasury have seemingly stopped their ascent, hovering this week between 5.22% and 5.35%. The respite follows a series of speeches from Fed Governors this week, as well as the FOMC minutes, which outlined the views of the committee. Policymakers are in agreement that combating inflation is still their first priority and see another rate hike before year end as likely. The timing of that hike, however, remains up for debate. It is likely that the Fed leaves rates unchanged in October as it awaits additional data and avoids a rate hike a week before the midterm elections. Most market analysts seem to agree; there is currently an 83% chance of a hold according to CME FedWatch.

Q3 corporate earnings kick off next week with earnings reports from the big banks starting on Tuesday. Leading into the season, earnings growth for the S&P 500 is estimated at +29.6% according to FactSet. If it comes to fruition, it will mark the third consecutive quarter of +25% growth for the index. Wednesday’s release of core and topline CPI inflation marks the highlight of the economic calendar, with PPI inflation to follow on Thursday.

by Gavyn Jensen-Schneider, Research Associate

Treasury yields continued to climb, though a positive inflation report stemmed some of the bleeding. The S&P 500 finished the week down -0.27%, while the Nasdaq rose +0.45%. The 10-Year Treasury yield, an interest rate indicator, closed at 5.27%, up +10 basis points (bps) from last week. The 6-Month US Treasury, a favorite of our US Treasury strategy, closed at 4.29%, down -7 bps from last week.

Yields on long-dated US Treasuries jumped in September, with the 10-Year rising nearly 50 bps over the course of the month. The sudden move in Treasury rates has centered on sticky inflation and expectations of future interest rate policy. Early this week, markets were pricing in four interest rate hikes through 2026 and 2027 as investors seemed to be growing increasingly worried about inflation.

Commentary from Fed Governors this week has been mixed, with Kashkari, Barr, Logan, and others espousing the hawkish view that more work needs to be done to combat inflation. Members of the FOMC leadership—Vice Chair Jefferson and New York Fed President Williams—expressed more dovish outlooks, suggesting that more time and economic data would be needed to determine the next policy adjustment.

This week’s Core PCE inflation and employment reports give credence to the “wait and see” view. The August Core PCE inflation reading surprised to the downside at 3.0%, 30 bps lower than Wall Street expected, while the September employment report of +29k net new jobs was well below the +90k analysts expected. The unemployment rate, which crept up to 4.2% in September, hasn’t materially changed since March of this year. It remains range-bound between 4.1% and 4.3%, adding more weight to the wait-and-see approach.

Chairman Warsh has repeatedly emphasized that trends in data are more important than any single data point, and trends across inflation and employment have yet to materially change. The 3-month average Core PCE inflation remains at 3.0%, above the Fed’s 2% target, while 3-month net new jobs average remains steady at around +51k. Still, this week’s fresh data points have quelled some market woes, as Fed Funds Futures are pricing in only three hikes as of Friday.

Some additional clarity on the Fed Board’s thinking might arrive in next Wednesday’s release of the FOMC minutes. Quantitative economic data releases will otherwise be limited, with Services PMI on Tuesday and the University of Michigan Consumer Sentiment index on Friday representing the week’s most important prints. Corporate earnings will be similarly quiet as we wait for the big banks to kick off Q3 earnings season on October 13.