Bonds Rally Ignores Oil as AI Stocks Stumble. Is That a Signal?

Bonds rallied again as chip stocks stumbled, shrugging off another climb in crude oil. Does that spell trouble for the AI boom?

• Treasury bonds extended their rally as chipmakers sold off again, even as crude oil climbed
• Gold held its footing and the US dollar weakened, defying the “war trade” readthrough from higher energy prices
• US CPI data will test who’s closer to the mark, markets betting on 50bps in rate hikes in 2027, or Fed officials expecting none

Long-term US borrowing costs keep falling, and crude oil is not the reason. Treasury bonds extended their rally even as oil prices climbed again. In the playbook markets have followed since the US-Iran war began in February, pricier energy means stickier inflation, bigger rate hike bets, and higher yields. That link seems to be weakening.

Other rate-sensitive markets followed the bond market’s lead. Gold kept trying to build a bottom despite the oil pop, which would have weighed on it not long ago. The US dollar weakened. The euro, perhaps the most hampered of the major currencies, tried to turn higher, while the Australian dollar and British pound pushed toward recent range highs.

Bonds seem to be trading the AI story

What has lined up with the bond rally is a stumble in the AI trade. Bonds jumped last week after a report that OpenAI’s revenue is running about $20 billion short of what markets expected. They rose again as chip stocks sold off for a second time this week. The latest slide began in South Korea, where chipmakers have been rattled by a report that Chinese rival CXMT will have a competing server memory product ready by December. The tech-heavy Nasdaq 100 is now testing the bounds of its advance since late July.

One explanation is competition for capital. Long-term yields reflect more than expectations for near-term inflation. Governments are selling heavy amounts of debt to finance yawning deficits, while hyperscalers are raising money to fund the AI buildout, and both draw on the same pool of long-term savings. If doubts about the AI boom suggest hyperscalers will borrow less aggressively than assumed, that pressure eases and bond prices can rise.

Bond market pricing fits that reading. The five- and 10-year breakeven inflation rates priced into Treasury bonds have moved against oil recently, as if the latest jump in crude is not enough to lift prices, perhaps because demand is softening underneath. The Cleveland Fed’s nowcast reflects the war’s cost-push effect on headline inflation, but its core gauge, which excludes food and energy, points lower. The Atlanta Fed’s GDPNow model has slid to 3.6% for the third quarter, down from 5-6% when tracking began, a sign that incoming data have weighed on the growth outlook.

Earnings did little to change the tone. Most major banks posted slight beats, though Wells Fargo’s revenue fell short at $21.9 billion against $22.3 billion expected, and Johnson & Johnson missed on earnings per share at $2.59 versus $3.03. FactSet’s blended estimates show third-quarter earnings growth of just 3% for financials, the weakest of any sector. The heavy lifting is expected to come from energy, at 121%, and technology, at 65.1%.

Will CPI side with the Fed or the markets?

The Fed turned more hawkish between July and September. Last month’s rate hike passed in a unanimous 12-0 vote, and updated projections upgraded both growth and inflation. Policymakers still see one more hike this year, with rates then holding steady through 2027. An overwhelming majority of them expect cuts by 2028. Markets agree on a December hike but price a further 50bps of tightening next year, clashing with officials.

Recent inflation trends favor the central bank. The three-month annualized pace of the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge, is already at the 2% target, and the smoother six-month rate is drifting in that direction.

The consumer price index (CPI) report on Wednesday is the week’s first big test. Headline inflation is expected to rise to 3.7% year-on-year from 3.4%, and the core rate to 2.5% from 2.4%. On a monthly basis however, core price growth is seen slowing to 0.2% from 0.3% previously. Producer price index (PPI) figures follow Thursday, and retail sales will show how consumers are coping. The University of Michigan’s sentiment index recently fell to its second-lowest on record as one-year inflation expectations jumped to 4.7%, the highest since May. Fed Chair Kevin Warsh is also set for a conversation with International Monetary Fund (IMF) Managing Director Kristalina Georgieva.

If CPI shows core inflation cooling, the markets’ 2027 rate hike bets may look overdone. That could extend the bond rally and support gold as the US dollar weakens. Stocks may not share in the relief, however, if what is pulling yields lower is a wobbling AI boom.

Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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