The Fed Goes Quiet. Big Tech Takes the Stage.

Last week, inflation was coming in hot at every stage of the pipeline, and the market still decided that the Fed would wait. The chance of a hike in October is now 1 in 6, and close to 90% odds of one in December. The pre-meeting blackout period started on Saturday, so there’s no one from the central bank will confirm or push back the pricing before the October decision. This leaves two other forces to move the market this week, which are the Mag-7 earnings of the season and the oil market.

Where we’re starting from

September CPI rose 0.6% on the month, followed by a rise in Core CPI of 0.3%, lifting headline inflation from 3.4% to 3.7%. Producer prices then had the largest monthly rise since March 2022, at 1.3%. Retail sales are also better than expected, but mostly because of patrol which fed GDP growth, which rose just 0.1%, so Americans are now paid more without buying more.

October hike odds briefly went above 50% after the CPI release before falling back. Kevin Warsh spoke in Bangkok on Friday and said the economy had “broadly conformed” to the Fed’s expectations and that he does not prejudge meetings, while New York Fed President Williams said that another hike this year might be appropriate. The 10-year yield swung from around 5.33% to 5.05% within a day before ending the week at near 5.10%.

Equities split hard. The Nasdaq fell 4,5% and the S&P500 also fell by nearly 2%, which is their worst week since June, while on the other hand, the Dow rose around 0.7% on rotation into banks, healthcare, and staples. Chip stocks fell for eight straight sessions even after TSMC announced a record profit and raised its outlook, as the stress spread into AI-related credit markets.

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Theme 1: Is the AI trade breaking, or just being repriced?

This is the question the market has to answer this week, with no help from the Fed. The takeaway from last week is that the strong numbers no longer protect the AI stocks. TSMC beat on profit, raised guidance, and its CEO says he sees no slowdown, but still, the shares fell. This kind of result usually means investors are less worried about demand and more worried about who is paying for it. Borrowing costs for some heavily indebted AI infrastructure companies have spiked, and that is where the stress is showing up first.

Meta and Tesla will be the first of the Magnificent 7, together with chip-equipment maker Lam Research, Texas Instruments and IBM. Netflix reports on Tuesday. Meta is the key one for this debate cause it is one of the largest AI spenders in the world, and its earnings are expected to fall YoY as that spending feeds through. The market will judge its capital-spending plans against the revenue they actually produce, not against last quarter’s ambition. Lam Research and Texas Instruments will give us the supply-side view, which is the equipment orders and broad chip demand outside the AI headline names.

What would change the entire story: Meta raising its spending plans while showing their clear revenue returns from AI, and the stocks going up on it. That would show the market is still willing to pay for AI investments as long as it comes with evidence. If a higher spending plan gets met with a selloff instead, it would confirm that the repricing still has further to run.

Theme 2: Is inflation spreading beyond oil, and beyond the US?

Last week's data already answered half of this question for the US. Core CPI rose 0.3% for a second month with broad-based gains, so energy is no longer the whole story. This week will test the global picture, and this matters because a worldwide inflation problem would keep pressure on bond yields everywhere, not just in the US.

The international calendar is quite inflation-heavy. Canada (Monday) is expected to rise to 3.2% from 3.0%, the UK (Wednesday) to 3.4% from 3.1%, and Japan (Friday) to 2.1% from 1.9%. All three are pointing the same way, which is up. Friday's flash PMIs for the US, Eurozone, UK and Japan will add to the business view, and this month the input and output price components are worth more attention than the headline activity readings. In the US, Friday's final University of Michigan survey will show us whether households expect higher prices to stick or not, and the Fed watches these expectations closely.

China is the exception. Q3 GDP (Monday) is expected at 4.4% after 4.3%, but Chinese consumer inflation is running below 1%, and the People's Bank of China will decide on rates on Tuesday. So Chinese demand is not adding to the global price pressure.

What would shift the whole situation: PMI price gauges easing across regions, or UMich inflation expectations falling. That would suggest the energy shock is peaking in prices rather than spreading, and would give the bond market room to rally.

Theme 3: Can the market hold "pause, then hike" with no Fed guidance?

The market has settled on a clear path, which is hold in October and hike in December. With officials in a blackout period, that pricing has to survive a whole week on data alone, and the US calendar is also quite thin this week. Thursday's weekly jobless claims (last at 199k) are the main labour read. Low claims would support the view that the economy can absorb another hike, while a jump would bring back the questions after September's 29k payrolls.

Housing is where higher rates are already doing the damage. Mortgage rates are now near three-year highs, and this week's housing starts and home-sales data are expected to show the sector under real strain. The Fed's semi-annual Financial Stability Report is also tentatively due on Tuesday. It's not a policy signal, but this time it is worth reading for what it says about the credit risk in AI-related borrowing and the stress that is already visible in some parts of the bond market.

The bigger risk to the "pause" side is oil. With Brent back above $100 and producer prices already surging, another leg higher in energy would make it harder for the Fed to wait until December.

Now, what could happen to change the situation: a sharp further rise in oil combined with firm PMI price data. That combination could pull the hike forward and put October back on the table, with no Fed speaker available to calm the move.

The one thing to watch

How Meta's shares react to its spending plans on Wednesday night. If the market rewards higher AI investment backed by returns, then last week was just a repricing. If the market punishes it, the AI trade has moved from "how much will they spend" to "can they afford it", and with the Fed staying silent until 28 October, there's nothing on the calendar that is positioned to stop that shift.

Key economic events this week

Weekly economic calendar

19 – 23 Oct

Date	Time (UTC)	Country	Event
Mon 19	02:00	CN	GDP YoY (Q3)
Wed 21	06:00	GB	CPI YoY (Sep)
Thu 22	12:30	US	Initial Jobless Claims
Fri 23	08:00	EU	Manufacturing & Services PMI (Oct)
Fri 23	13:45	US	Manufacturing & Services PMI (Oct)

Dates and times correct at time of publication. See the full economic calendar