Fed Holds Interest Rates Steady as Big Tech and AI Drive Market Gains
Market Reactions and Central Bank Developments
By Jamie McGeever
ORLANDO, Florida, Oct 28 (Reuters) - Wall Street rose on Wednesday after the Federal Reserve kept interest rates on hold and as investors focused on key earnings reports.
Federal Reserve Decision and Yield Curve Response
The Fed decision was expected, but the steepening of the yield curve suggests bond investors weren't fully convinced by Fed Chairman Kevin Warsh's assurances that inflation will get down to target in a timely fashion.
The AI Trade and S&P 500 Earnings Growth
In my column today, I look at how the lack of attractive alternatives for US equity investors is perpetuating the AI trade. Tech and telecoms services are expected to deliver half of the S&P 500's entire earnings growth this year, with six sectors accounting for a combined 10%.
Today's Key Reads
• Fed leaves rates unchanged as it awaits 'accumulation of more information'
• ECB can cool rate bets, but may not want to yet: Mike Dolan
• AI giants' funding ambitions test Wall Street's appetite for risk
• Chipmaker SK Hynix to return $75 billion to shareholders after record profit
• China's new export curbs draw a line around its AI crown jewels
Today's Key Market Moves
STOCKS: South Korea +7%. Japan, China +1%. Europe and UK little changed. Brazil -3%. Nasdaq and S&P 500 both +0.3%, Dow +0.2%.
SECTORS/SHARES: Eight sectors on the S&P 500 rise, three fall. Tech +0.5%, real estate -0.7%. Microsoft +6% and Alphabet -10% in after-hours trading following results. Oracle +11%.
FX: US dollar -0.2%. Canadian dollar steady, New Zealand dollar sinks 1% after rate decisions. Israeli shekel -2% after election, biggest fall since first day trading after October 7, 2023 Hamas attack.
BONDS: Gilt yields dip after UK budget, Canadian 2-year yield highest in two years, US yield curve steepens sharply after Fed Chair Warsh's press conference.
COMMODITIES/METALS: Oil rises; Brent +1.5%, WTI +3%. European gas 4-year high above 00/MWh.
Central Bank Policy Updates
Today's Talking Points
Three Down, Two to Go
Three of the five G10 central banks meeting this week delivered their policy decisions on Wednesday, and there was plenty to keep investors on their toes: the Fed changing its meeting schedule, a hike from the Bank of Canada, and a real surprise from the Reserve Bank of New Zealand, which knocked 1% off the kiwi dollar. Next up is the European Central Bank on Thursday, and the Bank of Japan on Friday.
There are common challenges facing all central banks, not least high and rising energy prices and bubbling inflation pressures. But that doesn't mean they're in autopilot tightening mode, as shown most dramatically by the RBNZ. Policymakers do retain the element of surprise, something one suspects Fed Chair Kevin Warsh strongly welcomes. With elevated energy and borrowing costs starting to bite in many countries, growth could begin to suffer, which would make central bank forecasting all the trickier.
Ready, Debt, Go
After the US earnings season comes the deluge... of debt supply. Bank of America analysts expect $175 billion of investment-grade issuance in November, up from around $100 billion in October and a record for the month. Surprise, surprise, AI is the big driver, with a fair chunk of M&A activity thrown in too.
Can debt markets continue to absorb this supply without suffering from indigestion? So far, they have, although lower-rated credits are starting to feel the strain. AI-related debt issuance from US Big Tech this year will be north of $200 billion, perhaps close to $250 billion. The pressure is building.
Term Premium
Remember the "term premium"? That's the unobservable level of extra compensation investors demand for holding longer-term bonds over short-term paper, an estimated premium for taking on a whole range of unforeseen risks over a period of years. Earlier this month, the New York Fed's estimate of the US 10-year term premium was almost 100 basis points, the highest since 2014, as investors fretted over inflation, the public finances, and heavy artificial intelligence debt issuance.
These worries remain and, it could be argued, are intensifying. Yet the term premium has tumbled to around 60 bps, and is now below this year's average of around 70 bps. What gives? Yields have pulled back from two-decade highs, as AI jitters on Wall Street sparked a safety bid for bonds. And Fed tightening expectations cooled somewhat. But that's about it. The term premium can be a useful indicator of investor sentiment and market stress points, but not always.
Upcoming Market Movers
What Could Move Markets Tomorrow?
• Japan consumer confidence (October)
• European Central Bank interest rate decision
• US sells $44 billion of 7-year notes at auction
• US GDP (Q3, advance)
• US corporate earnings, including Amazon, Intel, Mastercard, Caterpillar and Eli Lilly
Newsletter and Disclaimer
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(Reporting by Jamie McGeever;Editing by Bill Berkrot)
