The AI trade meets Washington

Summary

Last week in markets

Markets repriced sharply after Democrats won control of both chambers of Congress. The S&P 500 Total Return Index fell 2.17%, from 16,925.31 on Monday to 16,557.48 on Friday. Election clarity initially supported equities and Treasuries as investors anticipated greater policy restraint from divided government. By Thursday, however, attention had shifted to the potential for tighter oversight of AI infrastructure and limits on data center development. The reversal exposed the concentration in the technology trade and showed how quickly politics can reshape capital spending expectations and valuations.

Rates and commodities sent a more nuanced signal. The 10-year Treasury yield ended the week at 4.86%, down from 4.91% on Monday, even after October payrolls rose by 165,000 and unemployment eased to 4.1%. The stronger report reinforced expectations for a December rate hike, but safe-haven demand and lower energy prices restrained longer yields. January Brent settled at $98.32 per barrel, down 13.3% for the week after settling at $94.62 on Wednesday. Hopes that the election result could encourage an easing of hostilities with Iran drove the decline, while continued tanker attacks maintained a meaningful supply premium.

The week ahead

Tuesday's October CPI report will be the week's central macro event. September headline CPI rose 0.6% month over month and 3.7% year over year, while core CPI increased 0.3% and 2.6%, respectively. Another firm inflation print would strengthen the case for a December rate hike and could pressure duration and equity multiples. A softer reading, particularly in shelter and other persistent services, would temper the tightening outlook. This week's oil decline came too late to materially affect the October data, although sustained weakness could moderate headline inflation in subsequent months.

Friday's producer price report, Thursday's jobless claims and the Treasury's coupon auctions will provide a second test. Investors will assess whether pipeline inflation is broadening and labor conditions remain consistent with continued economic resilience. The Treasury will sell three-year notes Monday, 10-year notes Tuesday and 30-year bonds Thursday, putting demand for duration under scrutiny. Veterans Day on Wednesday may reduce liquidity, increasing the potential for larger moves around Tuesday's CPI report and Thursday's long bond auction.

Fed communication and geopolitics will shape how markets interpret the data. Governors Christopher Waller and Michelle Bowman are scheduled to discuss the economic outlook, while the Bank of Canada will publish deliberations from its October decision. China's inflation data Monday and UK and euro area GDP later in the week will provide a broader view of global demand. Markets will remain highly sensitive to any concrete movement toward or away from easing hostilities with Iran. Oil's weekly collapse has reduced near-term inflation pressure, but attacks near the Strait of Hormuz leave the supply outlook vulnerable to reversal.