Wall Street sinks as hot inflation raises prospect of Fed hike

Stocks on Wall Street sank as hotter-than-expected inflation in September raised the odds that the Federal Reserve would hike its benchmark rate later this month, while European markets shook off higher yields, as chipmaking equipment supplier ASML’s strong demand helped ease concerns about the artificial intelligence sector.

US financial stocks were generally weaker as bank earnings continued to roll in with Bank of America falling short of analysts’ forecasts, while Morgan Stanley’s beat wasn’t enough to keep it in the green.

Anthropic’s hotly anticipated initial public offering was still on with reports the Claude developer was meeting with potential investors, while neocloud AI infrastructure firm CoreWeave tumbled as prices for its bonds dropped into territory that typically indicates distress.

And Australian futures are pointing to a soft start to the day for the ASX, while the kiwi dollar dropped amid the widening interest rate differentials.

Federal blues

US consumer prices rose 0.6% in September, with core inflation of 0.3% coming in faster than the 0.2% forecast by economists. That prompted bond traders to increase their bets that the Fed would hike the federal funds rate a quarter-point at its meeting later this month, with the CME FedWatch tool pricing in a 34% chance of an increase, up from 22% yesterday.

“A hotter-than-expected US core CPI print sent US rates and the US dollar higher and US equities lower, as the market priced in more Fed tightening over the coming year,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “Although US rates retraced much of the move, currencies and equities did not.”

Stocks on Wall Street tumbled, with the Dow Jones Industrial Average down 0.5% in late trading, with Nvidia, Caterpillar and Goldman Sachs leading the blue-chip index lower. The S&P 500 dropped 1.4% and the tech-heavy Nasdaq Composite sank 2%.

Bank earnings were mixed, with Morgan Stanley beating expectations on the strength of its equities trading and wealth management arms, although the higher interest rate environment knocked its fixed income unit.

Meanwhile, Bank of America sank after missing expectations, with its profit knocked by a US$1.2 billion settlement with the regulator over the inability of the firm’s systems to monitor financial crime.

Asset manager BlackRock was among the day’s gainers as it continued to draw in new funds under management.

Everything AI

In AI news, Bloomberg reported Anthropic was set to meet potential investors in preparation of its IPO, slated for November, while Nvidia chief executive Jensen Huang said he would stop supplying chips to customers developing unsafe AI.

Meanwhile, neocloud firm CoreWeave tumbled 16% after reports that pricing for its 2032 bonds dropped into distressed territory, something CEO Mike Intrator dismissed as market irrationality, with orders enough to cover debt obligation.

Greg Boland, market strategy consultant at Moomoo, said semiconductor firms were still under pressure amid concerns about increased Chinese competition, and the scale of investment needed to keep the AI boom going.

“Investors are increasingly focused on whether that investment will generate adequate returns,” Boland said in a note.

Across the Atlantic, Dutch chipmaking equipment supplier ASML gained after reporting strong earnings, and saying customers were preparing to place orders for chipmaking tools in 2029 and 2030.

The UK’s FTSE 100 rose 0.7%, while Germany’s DAX increased 0.2% and France’s CAC 40 advanced 0.6%.

Brent crude oil futures rose 1.2% to US$106.94 at 7am in Auckland as tensions in the Middle East remain hot, with a Singapore-flagged cargo vessel struck in the Strait of Hormuz.

Meanwhile, Ukrainian energy facilities were hit by Russian strikes, cutting power in Kyiv for 600,000 people. Ukraine said its military lost access to a version of Starlink, supplied by the US.

Australian futures are pointing to a 0.3% decline for the S&P/ASX 200 index when the resources-heavy market opens today. Gold futures fell 2.7% to US$4,106 an ounce.

The kiwi dollar dropped to 55.81 US cents at 7am from 56.23 cents yesterday, and declined to 80.18 Australian cents from 80.37 cents.

No local data are scheduled for today.

Moomoo’s Boland said the immediate question for local investors was whether earnings growth could navigate higher interest rates and energy costs.

“Bank of America and Morgan Stanley’s results show that strong revenue in parts of financial services does not guarantee a positive share-price reaction,” Boland said. “Inflation, bond yields and company guidance remain the key signals to watch.”

Reporting by Paul McBeth. Image from engin akyurt on Unsplash.