US CPI beats forecasts as rate-hike bets fade; AI selloff drags Nasdaq down 4.5%

US September CPI rose 3.7% year on year, exceeding expectations, while core inflation also surprised to the upside. Bets on another Fed increase in October initially rose sharply but faded toward the weekend, and the dollar index lost around 0.6% for the week. Technology stocks sold off amid growing doubts about returns on AI investment. The Nasdaq Composite fell 4.5%, ending a four-week winning streak, while the Dow rose. Major-bank third-quarter results opened earnings season. In the Middle East, continuing conflict between the Houthis and Saudi Arabia pushed Brent on October 12 to its highest since mid-September. China's third-quarter GDP, released this Monday, exceeded expectations. The Fed, ECB and Bank of Japan will announce rate decisions next week.

Weekly overview: Inflation surprise lifts rate-increase bets before they fade

Markets were already pricing in further tightening before the CPI release. Reuters, citing CME FedWatch on October 13, put the probability of a December Fed increase at around 88%. Cleveland Fed President Hammack said that day the Fed should move relatively quickly toward a tighter policy stance.

The Bureau of Labor Statistics reported on October 14 that September CPI rose 3.7% year on year, above the expected 3.6% and the previous 3.4%. Monthly inflation was 0.6%, in line with expectations. Excluding food and energy, core CPI rose 2.6% annually, above the expected 2.5%, and 0.3% monthly, above the expected 0.2%. Energy remained the main driver, with gasoline prices up 9.1% in a month.

After the release, the priced probability of an October Fed increase rose from about 21% to around 47%, while the amount of tightening priced for the rest of the year increased from 27 to 36 basis points. The two-year Treasury yield rose about 13.5 basis points. By 09:05 US Eastern time, S&P 500 futures were roughly 0.4% below the previous trading day's close. However, tightening bets faded markedly before the weekend.

Foreign exchange: Dollar retreats after spike and loses about 0.6% for the week

The dollar index touched a near-18-month high on October 12. It stood near 102.05 before the CPI release and rose to 102.62 by 09:05 US Eastern time, around 0.6% above the previous trading day's close. As tightening bets subsequently faded, the index fell to 101.61 on October 16, ending the week down approximately 0.6%.

The yen remained under pressure. USD/JPY hovered near 158 and rose from 158.46 to 158.82 after the CPI release.

In France, the National Assembly began debating the 2027 budget on October 13. The Socialist Party retained the option of filing a preliminary rejection motion, while the government did not rule out using Article 49.3 of the constitution to force the budget through.

Oil: Brent reaches highest since mid-September

On October 12, Brent rose 1.8% to $106.65 a barrel, its highest since September 15, while WTI gained 2% to $93.74. Trump's statement that Russia would immediately supply more than 300,000 tonnes of diesel, along with a Russia–Ukraine ceasefire covering energy facilities, partly restrained gains. Goldman Sachs raised its December Brent forecast from $85 to $90 a barrel and estimated that the current risk premium was slightly above $20 a barrel.

Iranian Foreign Ministry spokesperson Baghaei said on October 12 that Iran was still assessing the US response to its proposal to reopen the Strait of Hormuz and would reply after completing its assessment. Pakistan and Qatar continued to mediate between the two countries.

Loud explosions were reported near Dhahran, home to Saudi Aramco's headquarters, on October 13. The Saudi-led coalition said debris from an intercepted missile had fallen into a residential area. As of 17:44 Beijing time on October 14, Brent traded at $105.92 a barrel and WTI at $94.71. On October 17, Iran's Islamic Revolutionary Guard Corps navy reported explosions on two supertankers in the Strait of Hormuz; no independent confirmation had been seen.

Gold: Falls after CPI before rebounding toward the weekend

On October 13, spot gold traded near $4,163 an ounce under pressure from a dollar close to an 18-month high. Gold fell sharply after the CPI release. By 09:05 US Eastern time, gold futures were near $4,110, around 1.6% below the previous trading day's close. December gold futures rebounded on October 16 as the dollar and Treasury yields eased.

Equities: AI selloff sends Nasdaq down 4.5% for the week

Major banks began reporting third-quarter results on October 13. JPMorgan's earnings per share were $5.57, below expectations of about $5.90, or $5.75 excluding a $658 million securities investment loss. Net interest income rose 13% year on year to $27.1 billion, and full-year guidance was raised to $106.2 billion. Goldman Sachs reported earnings per share of $17.01 and revenue of $18.68 billion, with equities trading revenue surging 72% to $6.44 billion. Citigroup posted revenue of $23.85 billion and earnings per share of $2.85, but expected fourth-quarter markets revenue to decline around 20% or more sequentially. Wells Fargo revenue was $21.87 billion, slightly below expectations. That day, the S&P 500 closed at 7,805.45, the Nasdaq at 27,204.38 and the Dow at 51,670.10.

Technology shares continued to weaken, pressured by tightening fears after the CPI surprise, doubts about returns on AI capital spending, and TSMC's cautious comments on its 2027 outlook. At the October 16 close, the Nasdaq stood at 26,140.03, down 4.5% for the week and ending four consecutive weekly gains. The S&P 500 closed at 7,659.44, down 1.9% for the week, while the Dow rose 0.7% to 52,002.41.

Corporate earnings still offered some support. FactSet data showed that by October 16, around 9% of S&P 500 companies had reported third-quarter results, and 84% of those had beaten earnings expectations. On Monday, October 19, China's National Bureau of Statistics reported third-quarter GDP growth of 4.5% year on year, above market expectations.

Cryptocurrencies: Bitcoin remains under pressure above $80,000

US spot Bitcoin, Ether and Solana ETFs all recorded net outflows on October 12. Spot Bitcoin ETFs returned to net inflows of around $176 million on October 13. After the CPI release, Bitcoin traded at $82,735 as of 09:05 US Eastern time, about 0.7% below the previous trading day's close. On October 15, it traded around $80,915.

Events to watch this week (Beijing time)

Risk notice: This material is for reference only and does not constitute investment advice. Financial markets involve risk, and past performance does not indicate future results.