Hotter inflation keeps the Fed in focus
Our Global Chief Investment Strategist Paul Eitelman sees markets caught between two competing forces this week: hotter U.S. inflation and renewed concerns around the artificial intelligence trade.
Both consumer and producer price inflation for September came in above expectations. Core PCE inflation is now tracking at roughly 3.1% year-over-year, a level that has remained stubbornly elevated through much of 2026.
That persistence helps explain why the Federal Reserve raised rates at its September meeting and keeps the possibility of another hike firmly on the table.
As Eitelman explains, the question may now be less about whether the Fed tightens again and more about when. Policymakers could move at the end of October or wait until the December meeting, with upcoming Fed communication likely to provide more direction.
There is more behind the inflation story than a single hotter reading. Persistent price pressures leave policymakers balancing the need to contain inflation against the risk that additional tightening weighs too heavily on growth and financial markets.
AI concerns outweigh the inflation story
The bigger market reaction this week came from renewed questions around the AI investment cycle.
Investors are increasingly scrutinizing whether the enormous levels of capital being committed to AI infrastructure are generating sufficient returns. At the same time, higher interest rates are drawing greater attention to leverage and financing risks among some of the more indebted companies tied to the AI buildout.
Those concerns translated into meaningful selling pressure.
Through Thursday’s close, the Nasdaq 100 Index was down roughly 3%, while the Philadelphia Semiconductor Index had fallen around 8%. South Korea’s KOSPI Index, another market with concentrated AI exposure, declined close to 16%.
As Eitelman notes, the reaction in fixed income was particularly telling. Hotter inflation would normally be expected to push Treasury yields higher. Instead, the 10-year Treasury yield fell roughly 16 basis points as investors moved toward safer assets amid the risk-off move in technology.
That suggests concerns around AI and market positioning outweighed the immediate inflation signal, at least for this week.
Midterms move closer into view
Investors are also beginning to look ahead to the U.S. midterm elections on November 3.
Russell Investments’ recent analysis examines how different congressional outcomes could affect policy and markets, as well as what political scrutiny of the AI data center buildout could mean for investors.
For Eitelman, the broader message is to look beyond short-term political headlines and focus on the policy and economic backdrop that ultimately drives markets.
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