A hot US inflation week collided with a violent unwind in AI-linked equities, leaving yields, the dollar and rate-hike odds lower than where they started.
Inflation ran hot, but the Fed refused to be rushed
The week was built around Wednesday’s September CPI, and it did not disappoint. Core rose 0.335% m/m against 0.2% expected and 2.6% y/y, with headline at 3.7% y/y; Thursday’s producer prices were hotter still, core PPI up 0.7% m/m versus 0.3% consensus, alongside retail sales that beat on the headline but whose control group grew just 0.15%. October hike odds, which had sat at 22% before CPI, spiked to an intraday 58% and briefly held above 50%. Officials then split in public — some arguing enduring shocks warrant action, Michelle Bowman repeating there is no urgency — before Chair Kevin Warsh used his Bangkok appearance on Friday to decline any guidance on the 27–28 October meeting. Pricing for an October move collapsed to roughly 15%.
The AI trade cracked, and Asia took the brunt
The week’s second engine was a semiconductor unwind that began Tuesday on reports of Chinese progress in denser DRAM and compounded daily. The Kospi fell between 6.3% and nearly 7% on Tuesday, then 8.39% on Thursday with circuit breakers triggered, ending the week down more than 15%; the Nikkei shed 5.08% in a single session. In the US, the S&P 500 fell 1.11% on Thursday, its worst day since July and the end of a 53-session run without a 1% decline, while the Philadelphia semiconductor index lost ground for a seventh consecutive session. Stress concentrated in AI credit: CoreWeave’s five-year CDS touched a record 1194bp before reversing. Friday brought rotation rather than capitulation — the Dow rose 1.08%, the equal-weight S&P beat the cap-weighted index by roughly 100bp, and Asia rebounded.
Treasuries round-tripped, and the dollar gave back its gains
Bonds told the clearest story of the week. The ten-year yield surged to 5.33% immediately after CPI, erased the entire move to close at 5.19%, and fell further on Thursday’s risk-off to around 5.09–5.10% — some 25bp below the post-data peak, despite firm data. Two-year yields ended the week below pre-CPI levels. The explanations offered ranged from 5%-plus yields finally biting equity valuations to short positioning that was less clean than it appeared. The dollar followed: a brief 18-month high on the inflation print gave way to a 0.5% fall on Thursday and the first weekly loss in five, with the euro recovering from 1.1113 into a 1.1200–1.1280 band. Sterling slipped to 1.3137 and the Australian dollar was hit by a 39.3k drop in September employment.
Energy kept the inflation narrative alive
Crude never left the story. Brent traded either side of $105 all week, closing Tuesday up 1.84% at $106 and sitting at $104.34 on Friday morning, on course for a second consecutive weekly gain. The driver was escalation rather than demand: repeated Houthi missile attacks on Riyadh, a strike on Saudi Aramco’s headquarters, and shipping rerouting away from the Strait of Hormuz. The energy ceasefire announced for Russia and Ukraine frayed within days, with Volodymyr Zelenskyy ordering strikes on Russian refineries to resume. The twelve-month Brent contract reached a 2026 high of $87.37, a curve-wide shift that feeds directly into the inflation debate on both sides of the Atlantic. Gold ended near $4,175 after a 1.5% Thursday gain.
France found some relief; the ECB leaned hawkish
European fiscal stress peaked early. The Franco-German ten-year spread hit a post-2012 high of 142bps on Tuesday as the 2027 budget debate opened amid a third week of student protests, before easing to 137bps — still clearly wide of pre-stress levels. By Friday, Finance Minister Éric Lescure said the turbulence was pushing parties toward prudence and voiced optimism that parliament would back €43 billion of deficit-reduction measures. The policy chorus hardened alongside: Klaas Knot called for a “mildly hawkish” stance, Joachim Nagel said further action could not be ruled out, and Christine Lagarde described the ECB as “well positioned” and watchful on second-round effects. EU leaders meanwhile asked the Commission to draft powers that could exclude a rival such as China from the single market.
What to watch this week
- The 27–28 October FOMC, with the October decision left unresolved: hike pricing collapsed to around 15% after Chair Warsh declined to guide, even as several officials argued further tightening is likely.
- Whether the semiconductor and AI-credit selloff resumes after Friday’s bounce, and whether Friday’s rotation into equal-weight and cyclical exposure persists.
- France’s budget process, including the social security bill and the resumption of the main bill in late October, and whether the government’s €43 billion package survives without invoking Article 49.3.
- The Russia–Ukraine energy ceasefire, now effectively unravelling, and continued Houthi attacks on Saudi infrastructure and Hormuz shipping.
- MSCI’s consultation on downgrading Indonesia to standalone status: a decision is not due until June 2027, but passive flows can move far earlier.
- The Bank of Japan’s October meeting, with reporting suggesting a lean toward December, and the 159–160 zone in dollar-yen that authorities repeatedly defended.
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