US inflation, AI demand and bank earnings: Five questions for markets in the week ahead

Global bond yields hover near multi-year highs and equities are feeling the pressure. The main event this week is the September consumer inflation data from the US, which should set markets on course for whether the Federal Reserve will raise interest rates at its late October meeting. Earnings season on Wall Street cranks into gear with the big banks reporting Q3 numbers. Two bellwether AI plays report earnings, while BP’s Q3 trading update is the major corporate event on the FTSE 100.

Here’s the key things to watch over the next week.

Will CPI inflation data tip the balance for the Fed?

September’s CPI inflation report is the big risk event for the week as it will provide the bond market with a clear steer on whether the Federal Reserve will raise rates for a second consecutive time at its late October meeting. The Cleveland Fed inflation nowcasting model places September CPI at +0.5% MoM and +3.6% YoY, whilst core CPI is forecast at +0.2% MoM and +2.4% YoY. If that holds with the actual data, it would mean the monthly core pace slowing from +0.3% in August to below the 'Waller Line' at +0.2%, which might just be enough for the Fed to wait until its December meeting to raise rates again. However, with bond yields telling the Fed the fed funds rate should be about 100bps higher it’s just as plausible that members – most of whom assume another hike this year is necessary, according to the last meeting minutes – just go on ahead and hike later this month. The CPI print is due Wednesday with producer price index inflation, often seen as a leading indicator of where consumer inflation is heading, released a day later. The data is likely going to be an important driver for bond markets, though we should also keep a close eye on budget drama in France, as any fresh blowout in the Franco-German yield spread is sure to ripple across credit markets.

What’s the impact of higher rates on Wall Street banks?

Investors will pore over US banks’ quarterly earnings for indications of how the recent surge in bond yields will impact dealmaking and raise funding costs. Earnings are set to rise about 20% for the largest Wall Street lenders on strong investment banking and trading revenue. But the focus will be on how the banks assess the spike in yields on their balance sheets and on how it will curb capital markets activity, with a couple of high-profile IPOs shelved or delayed in the last couple of months. Although credit portfolios seem to be holding up OK and the pipeline of debt issuance from AI remains very strong, the rise in yields has knocked the sector with the KBW Bank Index down around 13% since its August high. JPMorgan Chase, Goldman Sachs, Citigroup and Wells Fargo report on Tuesday 13 October, with Morgan Stanley and Bank of America on Wednesday. Bank of New York Mellon, Blackrock, Charles Schwab, Johnson & Johnson, Travelers, US Bancorp and UnitedHealth are also due to report earnings in the week 12-16 October.

What are you going to talk about, Kevin?

Federal Reserve chairman Kevin Warsh joins IMF director Kristalina Georgieva for a fireside chat on Friday. Market participants will be listening for any clues about the Fed’s likely course of action at the October meeting and more broadly for his assessment of inflation and the economy, although Warsh is famously reticent about giving forward guidance on the likely policy path. Conversation is bound to turn to the US fiscal position as well as monetary policy, with Georgieva this week urging governments to rein in spending and calling on central banks to be cautious, suggesting that “now may be a good time for a prudently hawkish bias in many countries”. The talk takes place at the IMF and World Bank meetings in Bangkok all week. Also due to speak at the event is Bank of England governor Andrew Bailey, as well as fellow rate setters Sarah Breeden and Huw Pill, who may offer clues about whether the central bank is preparing to raise interest rates in November.

ASML & TSMC: How strong is demand for semiconductors?

Two interconnected AI trade barometers are due to report earnings, with investors looking for any signs of weakness after OpenAI’s revenues were reported lower than the market had assumed, signalling some potential unease about AI demand. Dutch semiconductor technology supplier ASML reports Q3 earnings on Wednesday, with investors looking for it to build on accelerating growth and bookings as well as capacity expansion. Q3 guidance for the lithography giant points to 53% year-over-year sales growth and margins expanding to 56% with pricing power remaining robust. Taiwan Semiconductor Manufacturing Co (TSMC) also reports third quarter earnings. The world’s largest contract chipmaker posted revenue growth of 54.6% YoY in September, though sales slipped 0.6% from August. Signals from both of these bellwethers will be important for anything in the AI space and therefore for the broader market.

Is BP benefiting from higher oil prices?

BP delivers its third quarter trading update to the City on Tuesday, ahead of its full quarterly results on 3 November. Higher oil and gas prices provide a material tailwind with Brent crude back above $100 and refining margins wide open. Every $1 higher  for Brent makes BP an additional $340mn, the company said last quarter as it reported underlying replacement cost profit of $5.7bn, up $2.5bn from the prior quarter. The test is the comparison with Shell, which noted super-strong refining margins in the last quarter of $42 a barrel, up from $24 in the prior quarter. However, just as much as higher pricing is a boon, disruption in the Middle East remains a headwind for BP as it reduces oil output.

And one for the road(ster)...

Tesla is set to unveil its second-generation Roadster on Thursday. The event in Waco, Texas was rescheduled from 1 October due to adverse weather. But what’s two weeks’ delay when the vehicle is finally making its appearance 9 years after the prototype went on display and six years after it was due to go on sale? Shares of TSLA have had a good pop since the late July cycle low saw the $300 level tested, but have lately come into a bit of resistance in the $380s - can the roadster deliver another positive catalyst?