Invest1 publisher2 min readPublished
A 48-point drop in Fed hike odds fails to stop the 10-year yield's climb to a 2002 high
Traders cut the odds of a Fed hike this month to 23% from 71% in a week, and the 10-year Treasury yield still climbed to its highest since 2002. Stocks rallied on the softer Fed outlook, so AI earnings now have to justify equity prices against a risk-free rate above 5.3%.
The Investor · Invest desk
Drafted by a language model from the sources cited here and checked against its claim ledger before publication. How we use AISend a correction
What happened
- Softer-than-expected jobs data carried the Nasdaq to a record close, and Nvidia rose 2.1% to a record $5.76 trillion market value.
- Goldman Sachs estimates consensus forecasts point to 27% S&P 500 earnings growth for the third quarter, more than half of it from AI infrastructure beneficiaries.
- An ISM survey showed the prices services businesses pay for inputs at their highest level in more than four years.
- Investors dumped French government bonds after an underwhelming budget, though the premium over German 10-year debt narrowed to 137 basis points on Monday.
- Brent crude held at $100 a barrel after a 1.9% overnight drop as Middle East exports rose and G7 nations pledged more supply.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- constraint Governments and companies borrowing at long maturities face 24-year-high rates even with the Fed expected to hold, so a pause this month does not lower what they pay.
- exposure A shortfall at the AI infrastructure companies would hit more than half of the index's forecast growth while the 10-year pays above 5.3%.
- decision The services price reading gives Fed officials who asked for more data a reason to tighten, so the hike odds stocks rallied on can rebound with the next inflation report.
Top Federal Reserve policymakers said they wanted more data before tightening again. Within a week the market had taken 48 points off the probability of a hike this month [6][18]. The 10-year Treasury yield added 3 basis points overnight anyway, touching 5.3493% [7]. According to the CNA report, long-dated yields have climbed steadily since mid-August on inflation and debt concerns [8]. The 30-year briefly reached 5.7029% [10].
In Asian trade the 30-year held at 5.6622%, against 5.3089% on the 10-year [10][7]. Lending for the extra 20 years paid about 35 basis points [19].
"The rally in the market was tech led once again, with the marginal easing of interest rate uncertainty along with a slight moderation in geopolitical risk allowing market participants to focus on the extraordinary earnings growth being delivered by AI names," said Kyle Rodda, a senior analyst at Capital.com [3]. Nvidia's move alone added about $118 billion of market value in one session [20]. The consensus figure Goldman cited is concentrated. If AI infrastructure beneficiaries supply more than half of the expected 27% growth, they account for more than 13.5 points of it, and the rest of the S&P 500 for less than 13.5 [4][21].
In Europe the fiscal concern centres on France. "Deep divisions in France's parliament raises the risk that the proposed fiscal consolidation is diluted or that the government faces a no-confidence vote," said Joseph Capurso, head of international economics at the Commonwealth Bank of Australia [15]. Spanish Prime Minister Pedro Sanchez added to the political uncertainty by calling a snap election [12]. The euro touched $1.116, its weakest since May 2025, before steadying at $1.1215 [14].
There are two ways this can go. If AI earnings arrive at the forecast pace [4], stocks have profit growth to set against a risk-free rate above 5.3% [7]. The other path is the one this week already showed: inflation and debt concerns lift long yields while the Fed holds [8].
I think the second path will last longer, because the climb since mid-August survived a week in which the odds of a hike this month fell by about two-thirds [8][22]. The counter-thesis is the earnings forecast itself, since 27% growth is a large number to set against a higher discount rate [4]. The view is wrong if long yields fall back while the inflation and debt worries are still in place. That would mean the bond selloff was about the Fed after all.
What to watch
- Whether the euro falls to 1.1109, the support level Capurso said it will likely test as French fiscal risk builds.
- The first third-quarter reports next week from companies tied to AI infrastructure spending, measured against the 27% consensus Goldman cited.