US Market Wrap: AI jitters hit tech as Alphabet earnings disappoint; bonds rally

• SNAPSHOT: Equities mixed, Treasuries up, Crude down, Dollar down, Gold down
• REAR VIEW: PCE matches expectations, personal income/spending growth underwhelms and advance Q3 GDP prints above forecasts; US claims tick lower; US President Trump reportedly weighs resuming Iran strikes after midterms if diplomacy fails, though negotiations continue; US VP Vance reportedly reaches out to an Iranian hard-liner in a bid to restart peace talks; Iran's Ghalibaf said progress only possible once Iran's seven conditions are agreed; Houthis state they targeted Saudi Arabia's Ras Tanura, Abqaiq and Rabigh oil facilities with ballistic missiles; GOOG earnings disappoint, MSFT impresses but poor tech sentiment weighs; Software hit on underwhelming FTNT and NOW reports; LLY earnings beat lifts healthcare; Solid US 7yr note auction; ECB holds rates as expected, followed by hawkish Lagarde commentary; ECB's Lagarde to step down in February 2027.
• COMING UP: Data: French GDP (Q3), French Flash CPI (Oct), Spanish Flash CPI (Oct), German GDP (Q3), German State/National CPI (Oct), EZ GDP (Q3), Italian Flash CPI (Oct), Canadian GDP (Aug). Events: BoJ Policy Announcement (Oct), CBRT Minutes (Oct), EU-Canada Summit (29-30 Oct). Speakers: BoJ Governor Ueda; ECB’s Lane; Fed’s Musalem, Daly, Hammack, Cook. Supply: Australia. Earnings: Exxon Mobil, Chevron, AbbVie, Colgate-Palmolive, AstraZeneca, BP, NatWest, Sanofi.

Equities were mixed on Thursday as tech underperformed after a disappointing Alphabet earnings report (GOOG -12.5%), which missed on profit and revenue and showed worsening free cash flow, reigniting concerns over AI profitability. The weakness reversed Microsoft’s initial pop on its earnings beat and better-than-expected guidance. Microsoft’s lower-than-expected capex weighed on its infrastructure partners, with neoclouds seeing downside (NCLD -5.7%). Software and memory names were also hit, with ServiceNow (NOW -27.0%) and Fortinet (FTNT -20.1%) underwhelming. Elsewhere, earnings were more constructive, with beats from Eli Lilly, Merck, KLA, T-Mobile, eBay and Mastercard, while Marvell (MRVL -13.2%) sank on reports that it is in advanced talks to acquire Lumentum (LITE).

Treasuries rallied, with the curve steepening as front-end yields fell around 3bps. September PCE was in line with expectations, with core rising 0.3% M/M and 3.1% Y/Y. Personal income and spending both missed forecasts, while Q3 GDP was strong at 3.4% annualised and initial claims fell to 194k. The ECB’s hawkish hold added support, alongside source reports that it will hike in December. Money markets trimmed Fed hike pricing, with December now at around 20bps from 21.5bps, while the 7yr auction was solid, stopping on the screws. The Dollar was slightly softer, weighed on by lower yields.

Crude prices edged lower, as reports that VP Vance reached out to Iranian hard-liner Rezaei revived hopes for peace talks. However, Semafor reported that Trump had downplayed Vance’s efforts and is seriously considering resuming strikes on Iran after the midterms if diplomacy fails, while Iranian Parliament Speaker Ghalibaf said progress depends on Iran’s seven conditions being agreed. Elsewhere, the Houthis said they targeted Aramco in their latest wave of missile attacks, and Russia is set to extend its diesel export ban until year-end.

PCE: US September PCE report was broadly in line with expectations. Core prices rose 0.3% M/M (prev. 0.3%) and 3.1% Y/Y (prev. 3.0%), both as expected. Headline prices rose 0.5% M/M (exp. 0.5%, prev. 0.3%) and 3.6% Y/Y (exp. 3.6%, prev. 3.4%). Personal spending rose 0.5%, down from 0.9% and shy of the expected 0.6%, while personal income rose 0.2% (exp. 0.3%, prev. 0.3%). Real personal spending was flat M/M, after rising 0.5% in August. Following the data, WSJ’s Timiraos noted that core PCE services prices ex-housing rose 0.37% in September, lifting the 12-month rate to 3.6%, matching the highest reading since 2024. He added that core goods prices were also firm at 0.20% M/M. Core goods prices were falling Y/Y in 2024 but are now up 2%, and if they keep rising at this pace, the Fed will need more services disinflation to reach its 2% target. Looking ahead, Pantheon Macroeconomics expects core PCE inflation to peak at 3.3% Y/Y in December, up from 3.1% in September, as retailers pass higher producer prices on to consumers. Pantheon adds that services firms have widened their margins this year, but slower consumer demand will likely limit them to cost-only price increases next year. As a result, the consultancy still expects core PCE inflation to fall materially in 2027, to about 2.5% by year-end. It argues that this progress, alongside growing labour market risks, should dissuade the FOMC from tightening further after a final 25bps hike in December, and then persuade it to ease policy from mid-2027.

Q3 GDP (ADVANCE): The advance Q3 GDP report showed growth of 3.4%, above the 3.2% forecast and 2.2% prior, and marginally above the Atlanta Fed GDPNow tracker of 3.3%. Within the report, real consumer spending rose 3.8%, matching the Q2 pace, while the PCE price index increased 2.1%, well below the 3.4% forecast and 5.0% previously. Core PCE prices rose 2.5%, above the 2.4% forecast, but cooled from the 3.3% prior. The report noted that the increase in investment primarily reflected gains in private inventory investment and equipment, while the rise in consumer spending reflected increases in both services and goods. Within government spending, the increase was more than accounted for by federal government spending, led by nondefense consumption expenditures. Regarding trade, the decrease in exports primarily reflected a decline in goods, led by petroleum and related products, while capital goods, excluding automotive, accounted for the largest contribution to imports. Warsh acknowledged yesterday that Q3 GDP was likely running above 3% and that business investment was likely rising at a double-digit pace. The Fed also upgraded its assessment of economic growth in the statement from "solid" to "strong". Looking ahead, the Atlanta Fed's initial GDPNow estimate for Q4 is 3.2%.

CLAIMS: US initial claims dipped 1k lower to 194k, below the forecasted 199k, leaving the 4-week average lower at 196.75k from 198.0. Continuing claims also fell to 1.701mln from 1.722mln (exp. 1.720mln). The data shows a welcoming picture of a sustained low level of layoffs. Pantheon Macroeconomics noted that "the subdued level of claims reflects a very low economy-wide layoff rate, and leading indicators such as WARN and Challenger data suggest layoffs will remain low."

T-NOTE FUTURES (Z6) SETTLED 12+ TICKS HIGHER AT 106-06

Yield curve steepens as front-end yields decline following US data and the ECB rate decision. At settlement, 2-year -3.1bps at 4.654%, 3-year -3.2bps at 4.728%, 5-year -2.1bps at 4.800%, 7-year -2.2bps at 4.880%, 10-year -1.9bps at 4.984%, 20-year -1.0bps at 5.362%, 30-year -0.7bps at 5.324%.

THE DAY: The yield curve was lower on Thursday, with a slight steepening bias, continuing the move seen post-FOMC on Wednesday. Front-end yields declined by c. 3bps.

The economic data saw September PCE largely in line with expectations, with core PCE unchanged at 0.3% M/M, while headline PCE rose 0.5% M/M from 0.3% previously. Personal income and spending both fell short of expectations, raising some concerns about the consumer in what has otherwise been a healthy economy. Q3 GDP was strong at 3.4% (annualised), while the quarterly inflation metrics were welcomed, with core PCE prices rising 2.5% (prev. 3.3%) and headline PCE prices rising 2.1% (prev. 5.0%). Jobless claims remained below 200k, pointing to limited layoffs and a relatively stable labour market amid the broader low-hire, low-fire environment.

The data helped support Treasuries across the curve, as PCE remained broadly in line with forecasts, easing some inflation concerns following the hotter September CPI, PPI and import/export price reports earlier this month.

Elsewhere, the ECB rate decision also provided some support, as it held rates as expected and acknowledged that financing conditions have tightened, which is likely to weigh on inflation and growth. Sources later reported that a December hike is likely before a pause.

The USD 44bln 7-year note auction had little impact on price action but was solid overall, stopping on the screws with a low Dealer takedown and strong Direct participation. Next week sees the quarterly refunding announcement, where focus will remain on any adjustments to issuance guidance, alongside commentary on Treasury buyback operations.

Supply

• US sold USD 44bln of 7-year notes; stopped on the screws.
• US sold 4-week bills at a high rate of 3.910%, B/C 3.10x; sold 8-week bills at a high rate of 4.020%, B/C 2.63x.
• US to sell USD 95bln of 13-week bills and USD 82bln of 26-week bills on November 2nd, and USD 100bln of 6-week bills on November 3rd; all to settle November 5th.

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Dec 19.9bps (prev. 21.5bps), Mar 43.8bps (prev. 47.7bps)
• EFFR at 3.88% (prev. 3.88%), volumes at USD 116bln (prev. USD 115bln) on October 28th
• SOFR at 3.94% (prev. 3.95%), volumes at USD 3.074tln (prev. USD 3.147tln) on October 28th
• NY Fed RRP op demand at USD 0.35bln (prev. USD 0.18bln) across 4 counterparties (prev. 2) on October 29th
• NY Fed T-Bill Purchases (4-12 month): Accepts USD 1.83bln of USD 25.05bln offered; Offer-to-cover 13.71x

WTI (Z6) SETTLED USD 0.78 LOWER AT USD 102.00/BBL; BRENT (F7) SETTLED USD 0.84 LOWER AT USD 110.80/BBL

The crude complex was under pressure amid renewed mediation hopes. The WSJ reported after Wednesday's settlement that US VP Vance reached out to Iranian hard-liner Rezaei in a bid to restart peace talks, sparking broad risk-on sentiment. However, Semafor poured some cold water on the report, saying that US President Trump had downplayed Vance's efforts and suggested they were about humanitarian needs. The Semafor piece also said Trump is seriously considering resuming military strikes against Iran shortly after the US midterms if diplomacy fails, while the US remains engaged in negotiations over a temporary peace deal, which weighed on risk sentiment. Subsequently, Al Jazeera stated that Iran has not yet responded to the message from Vance. On talks, Iranian Parliament Speaker Ghalibaf remarked that Iran's conditions have been repeatedly and clearly stated to the mediators, and that progress can only be achieved once Iran's seven conditions have been agreed upon. Elsewhere in the Middle East, Fars reported that the Yemeni army had targeted Aramco in the latest widespread wave of missile attacks.

On products, Russia is set to extend its diesel export ban until the end of the year, according to sources. For the record, WTI traded between USD 99.79-102.31/bbl and Brent between USD 109.02-111.00/bbl.

CLOSES: SPX -0.30% at 7,721, NDX -1.38% at 29,403, DJI -0.25% at 52,343, RUT +0.96% at 2,858

SECTORS: Communication Services -6.6%, Technology -0.88%, Consumer Discretionary -0.63%, Energy +0.42%, Materials +0.88%, Industrials +1%, Financials +1.52%, Utilities +1.56%, Consumer Staples +1.64%, Real Estate +2.25%, Health +2.5%.

EUROPEAN CLOSES: Euro Stoxx 50 +0.72% at 6,212, Dax 40 +1.45% at 26,076, FTSE 100 +0.30% at 10,726, CAC 40 +1.05% at 7,970, FTSE MIB +0.39% at 50,018, IBEX 35 -0.16% at 18,853, PSI +0.80% at 9,320, SMI +1.29% at 14,769, AEX +0.59% at 1,142

STOCK SPECIFICS

• Alphabet (GOOG): Weak report; profit and revenue light, with worsening negative FCF.
• Microsoft (MSFT): EPS, revenue and operating income topped, with better-than-expected guidance; looks to raise at least USD 25bln via a USD bond sale.
• CoreWeave (CRWV), Nebius (NBIS), IREN (IREN): Pressured as Microsoft's lower-than-expected capex points to infrastructure partners taking longer to deliver capacity.
• Fortinet (FTNT): Product revenue short of expectations, with FY services guidance cut and next-quarter revenue guidance well short of bullish expectations.
• ServiceNow (NOW): Underwhelming subscription revenue guidance, with a bookings and profit miss.
• KLA (KLAC): Headline metrics topped, with strong next-quarter guidance.
• Cognizant (CTSH): Weak next-quarter revenue outlook.
• T-Mobile US (TMUS): Profit, revenue and postpaid subscriber additions beat, alongside strong FY guidance.
• eBay (EBAY): Solid headline numbers and GMV, alongside an upbeat holiday-quarter outlook.
• Norwegian Cruise Line (NCLH): Top and bottom lines beat, with an upbeat FY profit view.
• Caterpillar (CAT): Top line shy of expectations.
• Mastercard (MA): Q3 results beat.
• Eli Lilly (LLY): Headline metrics topped, with a strong drug sales breakdown and a lifted FY revenue outlook.
• Merck (MRK): Topped Q3 expectations as Keytruda and Gardasil outperformed.
• Lumentum (LITE): Marvell (MRVL) is in advanced talks to acquire the company.

USD: Price action was mixed against peers, leaving the DXY slightly down, as a lower-yield backdrop weighed on the buck. Yields across the curve traded lower in response to a PCE report that matched expectations on inflation, accompanied by shortfalls in personal income and spending growth vs forecasts. Thereafter, losses in tech extended at the cash open, igniting concerns over AI profitability following Alphabet's disappointing earnings report (EPS and revenue missed). The move soured sentiment, reversing Microsoft's initial pop higher on its earnings beat, while memory and software were also hit as names in both sectors underwhelmed on earnings, adding to pressure on US tech.

Meanwhile, the advance Q3 GDP release beat expectations, with growth at 3.4% on an annualised basis, while quarterly inflation figures eased. The Atlanta Fed's initial GDPNow Q4 estimate for real GDP growth is 3.2%.

G10 FX performance was split. GBP and CHF were the top performers vs. the USD. Separately, AUD continued to lag, weighed on by mixed risk sentiment and weaker precious metals.

Sterling was the best performer in the aftermath of the UK Budget, despite newsflow being light on Thursday. GBP/USD climbed to around 1.3368 at the time of writing, paring the majority of WTD losses.

EUR was slightly firmer against the buck following the ECB's decision to hold rates as expected. It was soft heading into the meeting, after the ECB confirmed President Lagarde will step down on February 7th, 2027. Initial EUR weakness was seen on the statement and decision before reversing when President Lagarde said the early stages of the pricing chain point to upward pressures, lifting EUR/USD from 1.1125 to 1.1137. A further hawkish move followed when she said the situation could have warranted a hike, adding that today's decision does not indicate the ECB will not hike at its next meeting. Later, ECB source reports (via Bloomberg and Reuters) indicated that policymakers will raise rates at the December meeting. EUR/USD now trades around 1.1168.

USD/JPY is in focus ahead of the BoJ rate decision overnight, where rates are expected to remain at 1.25%. Tokyo CPI is also due in overnight trade.

Sessions where a single mega-cap earnings miss leads the tape while rates rally on in-line inflation data follow a familiar sequence: an idiosyncratic tech catalyst hits concentrated index leadership, while the rates market reads the macro calendar independently, and the two rarely stay coupled beyond the first few hours. The split here is the classic one, equity weakness driven by earnings-specific repricing in a handful of large weights against a duration bid driven by data, with defensives and rate-sensitive sectors outperforming as yields fall, a rotation pattern typical of growth-scare sessions rather than broad risk-off ones. The case distinction worth drawing is between an AI-capex profitability scare, which tends to concentrate in the megacap complex and its infrastructure suppliers, and a genuine macro deterioration, which would show up in credit spreads, cyclicals, and the belly of the curve rather than just the Nasdaq complex. On the rates side, in-line core inflation alongside soft income and spending prints has historically trimmed the near end of the policy path while leaving the long end relatively anchored, producing the kind of mild steepening seen here; strong auctions in the belly have tended to reinforce rather than reverse that move. The follow-ons are whether the earnings-driven weakness broadens beyond the miss names into the wider AI supply chain, whether subsequent officials and the next data round validate the trimmed front-end pricing, and the overnight central bank decision flagged in the calendar. Wraps of this kind are a summary of flow, not a signal in themselves.