Treasury yields surged and equity indexes sank after the government said consumer prices rose last month at a faster clip than Wall Street forecast. Technology and other sectors closely connected to the artificial intelligence (AI) revolution reflected today's sharp risk-off turn, as healthcare, consumer staples and energy stocks caught bids.
The 2-year Treasury yield (+1.5 bps, 4.808%) spiked more than 10 basis points within minutes of the release of a red-hot September CPI report, but eased back through Wednesday's trading session. "On balance," Barclays economist Pooja Sriram writes, "this morning's inflation data are unlikely to provide much comfort to policymakers."
Sriram says risks economists "have flagged for some time, including energy pass-through into core prices, resilient consumer spending, and AI-related price pressures" are becoming bigger factors in the price stability equation.
As the economist concludes, "Although favorable base effects should mechanically lower annual inflation rates next year, the recent run of prints casts doubt on how much progress is being made on underlying inflation."
The 10-year Treasury yield (-2.7 bps, 5.19%) and the 30-year Treasury yield (-4.6 bps, 5.517%) were lower at the end of a volatile session in the bond market. CME FedWatch now shows a 34.9% probability of a 25-bps rate hike at the conclusion of the October 27-28 Federal Reserve meeting, up from 22.1% on Tuesday.
Investors, traders and speculators will turn their attention to the release of September's Producer Price Index (PPI) and retail sales data before Thursday's opening bell for the next clues on interest rates and monetary policy.
ASML sends a risk-off signal
By the closing bell, the Nasdaq Composite had taken a 1.9% tumble to 26,692, the tech-heavy index anchored by a seventh straight losing session for chipmakers on a mixed earnings calendar showing from one of the industry's overseas stalwarts.
The broad-based S&P 500 was down 1.1% to 7,719, and the blue-chip Dow Jones Industrial Average had slipped 0.09% to 51,622, as other groups boosted by the AI buildout reflected the macro mood.
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Netherlands-based ASML (ASML, -3.9%) reported a 47% increase in third-quarter revenue and 127% earnings growth, just missing on the top but easily beating on the bottom line. Management raised fourth-quarter sales guidance, too.
ASML also said it would struggle to meet demand for its chips in 2027 and 2028, indicating a healthy order backlog that should signal good things for semiconductor stocks.
Alas, Nvidia (NVDA, -3.2%) was among the worst Dow Jones stocks on Wednesday, joined by Caterpillar (CAT, -3.1%). The industrial stock is among those names, beyond tech and communication services stocks, benefiting from AI-driven demand.
Amid broader curiosity about the trajectory of the federal funds rate, markets seem wary of any and all kinds of open questions, even (perhaps especially) as they relate to growth expectations.
“Uncertainties around ASML's ability to ship DUV [deep ultraviolet lithography] tools to China remains a hot topic with investors," BofA Securities analyst Didier Scemama wrote ahead of ASML's report. "However, we think this is likely largely baked in the stock."
Scemama reiterated his Buy rating and his $2,915 12-month price target on ASML's American Depositary Receipt (ADR), which closed at $1,650 on Wednesday.
Bank of America pays up
Bank of America (BAC, -4.7%), because of a potential positive impact on net interest margin, is among the best stocks to buy for rising interest rates this fall.
The big bank also looks like a big bargain after BAC suffered its worst post-earnings share-price decline since the early aftermath of the global financial crisis more than a decade and a half ago.
As Jefferies analyst David Chiaverini notes, the Treasury Department announced a $1.2 billion fine on Bank of America for violations of anti-money laundering rules previously identified in a December 2024 consent order.
The fine resulted in a 17-cent-per-share hit to BAC's bottom line. But Chiaverini, who has a Buy rating on BAC and considers the financial stock a "Franchise Pick," now sees upside from here of about 36% based on his 12-month target price of $70.
"While the charge is a meaningful one-time hit," the analyst observes, "we believe remediation costs are largely embedded in the current expense base. The key debate is how long the consent order could be in place and the extent to which it could impede operations, if at all."