When the risk changes address

Last week ended with a warning. Bad news about the economy no longer pulled long-term yields down, and the biggest risk appeared to sit with governments that have to borrow. September inflation would put that idea to the test. A high reading could quickly bring back the odds of an October rate increase.

The reading was high. US inflation rose to 3.7 percent, producer prices jumped 1.3 percent in a single month and Brent touched 110 dollars for the first time since May. Everything pointed to higher yields.

Yet the US ten-year yield fell over the week from 5.24 to 5.09 percent. The reason lay not in Washington but in the technology sector, where investors began to ask how the AI buildout is being paid for. The Nasdaq lost 4.5 percent. The risk still sits with whoever borrows. This week the borrower is a different one.

Inflation climbs and the Fed does not look up yet

Wednesday's inflation report left little to guess. Consumer prices rose 0.6 percent in September on the month and 3.7 percent on the year, against an expected 3.6 and 3.4 percent in August. Energy was 20.4 percent more expensive than a year earlier, and gasoline rose 9.1 percent in a single month. Core inflation, excluding energy and food, rose to 2.6 percent. A day later producer prices rose 1.3 percent, the largest monthly increase since March 2022, and retail sales grew 0.8 percent, against an expected 0.3.

The Fed's Beige Book confirmed the picture. Higher oil prices affected every district, and in four districts the pace of price increases picked up. Many firms expect further increases as contracts expire.

The probability of a hike on 28 October briefly jumped to around 50 percent after the report. On Friday Fed Chair Kevin Warsh told the IMF meetings in Bangkok that he does not "prejudge meetings," and that the Fed has made clear it will deliver price stability. The market mostly heard the first part. By the end of the week the odds of an October hike stood at around 13 percent, and those for December at roughly 90 percent. The report did not change the Fed's view. It made December more likely.

Government bonds become a refuge again

After the inflation report the ten-year yield climbed to 5.33 percent during Wednesday's session. Then the market turned. On Thursday the yield fell by about 10 basis points, the biggest one-day drop since August 2025, and on Friday it closed at 5.09 percent. The thirty-year yield fell from 5.60 to 5.43 percent, the two-year from 4.80 to 4.74.

That decline did not come from better budget news. On Friday the Treasury reported a deficit of 1.99 trillion dollars for fiscal year 2026, more than 6 percent of GDP and the largest in five years. Investors bought Treasuries because they were selling stocks. According to TD Securities, the AI selloff forced the market to lower its growth expectations, which gave bonds back their role as a buffer against falling equities.

Last week the market demanded more compensation to lend to the US government for a long time. This week it fled to that same government. The deficit has not shrunk. The alternatives have become riskier.

The bill for AI arrives

The S&P 500 lost 1.9 percent to 7,659.44, its worst week since June, and fell below its 50-day moving average for the first time since mid-September. The Nasdaq dropped 4.5 percent to 26,140.03 and the Russell 2000 of smaller companies 3.0 percent. The Dow, by contrast, gained 0.7 percent to 52,002.41. Investors sold growth and bought stability. The VIX rose to 19.99.

The centre of the turmoil was CoreWeave, a company that rents out computing power for AI and was built with a great deal of debt. According to Reuters its bonds fell to distressed levels. The stock lost almost 12 percent on Friday, and chipmakers such as Micron and Intel fell around 6 percent. Support from Nvidia chief executive Jensen Huang brought a brief recovery on Thursday, but did not settle the question of whether AI investment generates enough cash flow to carry the debt.

The big banks opened the earnings season unevenly. Goldman Sachs beat expectations comfortably on equities trading, while JPMorgan fell short for a rare time. Demand for AI has not disappeared. The question of who finances the buildout is new.

France survives the first vote

In Paris the debate on the 2027 budget, with 54 billion euros in savings, began on Tuesday. A Socialist motion to reject the bill outright failed by 236 votes to 149. The deciding votes came from the Rassemblement National, which voted against the motion because, in its view, the debate should take place. Lecornu gained no majority, only time.

The bond market stayed cautious. The gap between French and German ten-year yields widened from 132 basis points last Friday to around 137, with the French yield holding near 4.8 percent. On Thursday Eurostat confirmed euro area inflation of 3.8 percent for September, with energy 18.9 percent more expensive than a year earlier. Dutch inflation held at 3.0 percent.

Christine Lagarde said on Wednesday that the ECB does not yet see second-round effects, meaning that higher energy prices are not yet feeding into wages and other prices. The IMF expects at least one more increase of 0.25 percentage points this year. The euro rose to 1.1235 dollars, its first weekly gain after five weeks of losses. Europe found calm this week. Not a solution.

Oil above 100, gold without direction

Brent rose 4.9 percent over the week to 109.86 dollars, its highest close since mid-May. WTI gained more than 10 percent to 101.41 dollars, above 100 for the first time in almost a month. According to the British maritime agency UKMTO, at least twelve ships were attacked around the Strait of Hormuz in the week to 16 October. One container ship sank. At the same time Ukrainian drones continued to strike Russian refineries, and Houthi attacks on Saudi Arabia went on.

Flows through the strait did recover, to 11.6 million barrels a day in the week to 13 October, about 68 percent of the pre-war level. Norbert Rücker of Julius Baer put it plainly: "We are not running out of oil." The price reflects fear more than shortage.

Gold fell to around 4,073 dollars an ounce after Wednesday's inflation report and recovered to around 4,166, a small weekly loss. The dollar index fell 0.45 percent to 101.77, its first weekly decline in more than a month. A weaker dollar helped gold. Higher yields after the inflation report held it back.

Where this leaves the markets

The weekend brought no relief. Iranian Foreign Minister Abbas Araghchi said on Sunday that the conditions for reopening Hormuz still stand. On Saturday a supertanker struck a mine, according to the Revolutionary Guards, a tugboat was hit on Sunday, and the Houthis again fired missiles at Saudi Arabia. According to US media, Washington is preparing options for larger strikes, but only after the elections of 3 November.

The Fed is now in its quiet period ahead of the 28 October decision. Next week Tesla and Netflix are among the companies reporting, and the budget debate continues in Paris. Israel votes on 27 October, the Fed decides on 28 October, the ECB a day later, and on 4 November the Treasury sets out its borrowing plans.

Last week the borrower became the risk. This week showed that the borrower is not only a government. Investors fled companies that borrow to build AI for the government they distrusted a week earlier. Inflation rose, yields fell. The risk has not disappeared. It has changed address.