by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on rising concerns about the AI buildout. We then turn to geopolitics, examining the US’s potential decision to relax sanctions in response to growing voter pushback. Next, we briefly cover a bill to tax data centers, the possibility of another US strike on Iran, and an update to the debt outlook for an AI developer. As always, we conclude with a review of recent domestic and international economic data.

AI Slowdown: Concerns about speculative AI debt have fueled optimism that the Fed may not need to tighten monetary policy as aggressively. This shift in sentiment stems from a potential slowdown in the AI buildout, driven by doubts over whether certain data center operators can service their debt. The market reaction highlights the significant impact this expansion is expected to have on US Treasurys and provides Fed officials with additional factors to consider when making their rate decision later this month.

• Debt sustainability became a major concern for investors following a surge in credit default swap (CDS) prices for CoreWeave. Because CDS contracts function as insurance against default, their prices serve as a proxy for credit risk. On Thursday, the rising cost of these contracts implied a roughly 60% probability that the company would default on its debt within five years.
• Much of this worry comes from CoreWeave’s rising debt load and its perceived reliance on circular financing. Nvidia — acting simultaneously as a primary supplier, equity holder, and key financier — has funded much of the capital CoreWeave uses to purchase its graphics processing units (GPUs). Seeking to calm investors, Nvidia’s CEO noted that despite market fears over debt quality, CoreWeave does not require an additional backstop and its cost of capital is actually decreasing.
• Following the recent turmoil surrounding CoreWeave, investors rushed to safe-haven assets, driving up demand for sovereign debt. Yields on the 10-year US Treasury fell to their lowest level in nearly a month, while German government bonds also saw increased demand. This shift reflects growing investor expectations that debt concerns could slow the AI buildout, which has been a major source of demand-side price pressures across the economy.
• As the Federal Reserve prepares for its next meeting, officials are likely to weigh recent AI-related market turmoil when setting interest rates. Minutes from the September FOMC meeting reveal deepening concern among Fed leadership over AI’s impact on prices and the risk of broader economic contagion. Consequently, a potential slowdown in the AI buildout could alleviate some of these worries and reduce the need for a rate hike before December.

Sanctions Relief? The White House is seeking to ease energy market stress by relaxing some of its restrictions. On Thursday, it was reported that the Trump administration may allow shadow fleets from Russia and Iran to sell their fuel, in an effort to ease the strain on oil prices. The change is due to the weight that the president’s foreign policy has on voter sentiment going into the midterms. While the US plans to maintain pressure on its rivals after the midterms, the shift does represent another example of its lack of commitment to its hegemonic role.

• A proposed rollback of maritime restrictions would allow blacklisted vessels to be sold to legitimate operators and return to normal service. While not yet finalized, the move comes as the US loosens restrictions on Russian diesel and urges the EU to tap strategic energy reserves to relieve global market pressure. If enacted, these measures should help increase shipping capacity and lower freight rates over the coming weeks.
• The changing US stance has not gone unnoticed by its allies. European Union leaders have pushed back against Washington’s efforts to ease pressure on Moscow, growing suspicious of the White House’s foreign policy direction. Brussels has already signaled to the Trump administration that it will not unfreeze Russian assets unless Moscow halts the war. Furthermore, the EU is accelerating plans to develop an alternative to Starlink following disruptions in satellite support for Ukraine.
• A growing preference for domestic priorities over foreign commitments is driving a noticeable shift in US policy. Over the past five years, public approval across successive administrations has suffered under the weight of foreign entanglements. Geopolitical friction with Iran and Russia has proven particularly costly, as the resulting energy supply shocks inflicted direct economic pain on US consumers in the form of elevated inflation.
• A retreat from the US’s global hegemonic role will likely have profound implications for commodity markets. Historically, US leadership has provided systemic stability for global commerce by securing sea lanes and promoting open trade. A withdrawal of this support could accelerate market regionalization, as rising transportation and insurance costs make long-distance commodity trade increasingly expensive.

Data Center Pushback: Senators Bernie Moreno (R-OH) and Josh Hawley (R-MO) have introduced joint legislation aimed at taxing data center construction. Under the proposed bill, any state incentives — including loans and grants used to attract data centers — would face a 100% federal tax. While the bill’s chances of passage remain slim, the initiative underscores how lawmakers are taking an increasingly hardline stance on data centers to address voter anxiety surrounding the AI buildout.

New Iran Attack? The White House continues to hint at the possibility of resuming military operations against Iran after the midterm elections. On Thursday, the president stated he would not drop a nuclear bomb but refused to rule out using the “Mother of All Bombs,” a weapon powerful enough to rupture the lungs of those nearby. His remarks come amid widespread expectations that the US could resume military action post-election as part of an effort to eliminate Iran’s nuclear capabilities.

Anthropic Debt: While data center developers have come under scrutiny over debt quality, one leading AI lab is seeing a more favorable credit outlook. On Friday, Kroll Bond Rating Agency (KBRA) assigned Anthropic a credit rating just one notch below investment grade. Although the rating was based on selective disclosures that omitted core financial metrics such as free cash flow and EBITDA, the move is expected to bolster market perception of its debt and potentially pave the way for lower future borrowing costs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our thoughts on speculative AI debt. Next, we discuss growing signs that inflationary pressure is building in the economy. We then briefly cover the new ways that hyperscalers are getting communities to sign off on data centers, as well as the push by the White House to restart peace talks between Russia and Ukraine. As always, we conclude with a roundup of key domestic and international economic data.

AI Concerns: The market is beginning to show uneasiness regarding debt quality for companies tied to the AI infrastructure buildout. CoreWeave has become the latest to face scrutiny, with its debt falling into distressed territory. These rising fears over AI-related debt have triggered a rotation out of speculative bonds and into government debt as investors seek safer alternatives. Though this sentiment shift currently appears limited to a handful of companies, it could indicate a broader market trend ahead.

• CoreWeave’s weakness stems from concerns over its balance sheet as investors begin to price in a potential AI slowdown. As a specialized cloud provider, CoreWeave generates revenue by equipping data centers with Nvidia GPUs (Nvidia is also an investor) and renting out compute power to AI labs. Although demand for its services has surged, the company has taken on substantial debt alongside rising operational costs, raising questions about the sustainability of its rapid expansion.
• While CoreWeave remains the focal point, credit risk is spreading across the AI space. In recent weeks, credit default swap (CDS) spreads have widened for Oracle and SpaceX as investors gauge potential friction in the AI expansion. Five-year default probabilities derived from current CDS pricing sit at nearly 50% for CoreWeave, 20% for Oracle, and 16.5% for SpaceX, far above the 3% historical average for speculative-grade debt.

• The weakness in the AI trade comes as companies grapple with the rising costs of AI hardware, elevated borrowing rates, and declining compute prices. Following years of steady decline, semiconductor equipment costs have spiked to levels not seen since the dot com bubble. At the same time, higher government debt yields have pushed up corporate borrowing costs, making debt loads increasingly unsustainable, while cloud providers face growing pressure to cut prices to stay competitive.
• Beyond AI itself, credit markets are still our primary focus. If a moderation in AI investment results merely in a reduction of capital expenditure, the broader economy should remain resilient. However, if rising credit stress triggers a tighter lending environment across other sectors, the fallout could extend well beyond technology. So far, the evidence points to the former. If that holds true, it could even benefit AI labs, as excess capacity would likely push down compute prices.

Inflation Worries: Signs of mounting price pressures have fueled speculation that the Federal Reserve could raise rates again this month. The latest Beige Book reported a pickup in inflation across several districts, while September’s CPI report showed prices rising faster than expected. Together, the data has raised concerns that the Fed may be falling behind the curve on inflation heading into its October 27-28 meeting. Fed officials, however, continue to send mixed signals about their next policy decision.

• Half of the Federal Reserve’s 12 districts reported robust or intensifying price pressures in recent weeks. Some contacts across the districts cited higher oil and diesel prices, whereas others pointed to rising costs for other commodities, as well as tariffs and insurance. Firms also said higher input costs were squeezing margins, and some indicated a willingness to pass those costs on to consumers as they navigate heightened uncertainty.
• September’s CPI reflected similar inflation pressures. Headline CPI accelerated to 0.6% month-over-month from 0.4% in August, while the core index rose 0.3% for a second straight month. Both readings came in slightly above market expectations, and both were well above their pre-pandemic norms. In fact, on a non-seasonally adjusted basis, core CPI posted its highest September reading in over four years.

• While inflation continues to be a problem, a Fed hike is far from certain. For one, even though growth has been robust, there are indications that it isn’t being felt across the entire country. According to the Beige Book, seven of the 12 districts reported only slight or no growth in economic activity since the last report. Additionally, job gains, while better than last year, are still relatively sluggish, suggesting that firms may be feeling the effects of previous tightening.
• As the Fed heads into the blackout period this weekend, it continues to be unclear which way policymakers will lean. While most Fed officials appear to back at least one more rate hike this year, whether it comes in October or December remains up in the air. Markets now price roughly even odds of a hike this month after the September CPI report sharply raised expectations. Further Fed tightening would likely weigh on bond prices.

Tech Pays Up: Data center developers are evaluating direct cash incentives for local residents to ease community opposition. In Kansas, a real estate firm has partnered with major technology companies to offer households $1,000 annually over a 10-year period in exchange for supporting local development. The initiative comes as developers seek innovative strategies to overcome mounting public pushback against large-scale infrastructure projects.

Russia-Ukraine: The US is making renewed diplomatic efforts to bring Russia and Ukraine to the negotiating table. Recently, the White House floated to European allies the idea of unfreezing Russian assets to help restart talks. However, the proposal was met with minimal support from the European Union, which remained skeptical of its effectiveness. The initiative has raised fresh concerns about the long-term US commitment to Ukraine, particularly as both Russia and Ukraine continue to target each other’s energy infrastructure amid already elevated prices.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an update on the escalating conflict in the Middle East, particularly as Saudi Arabia becomes more deeply involved. Next, we discuss how Fed officials continue to keep forward guidance alive even as the Fed chair tries to do away with it. We then briefly cover Fed Governor Lisa Cook’s decision not to attend a hearing, as well as the global pressure on Putin to join an energy truce. As always, we conclude with a roundup of key domestic and international economic data.

Broadening Conflict: The war in Iran continues to show signs of spreading across the Middle East. This week, the Houthis stepped up their attacks on Saudi Arabia, while Iran intensified its attacks on ships transiting the surrounding waterways. The escalation marks a sharp rise in regional tensions that has continued to push energy prices higher worldwide. However, while the conflict has added to price pressures, it is important to remember that not all regions will necessarily be affected equally.

• Saudi Arabia is being drawn deeper into the conflict as Houthi attacks target major cities, including Riyadh, hitting both civilian areas and critical energy infrastructure. To counter these threats, the kingdom has relied on a coalition of member states to help repel incoming strikes. This escalation comes as Saudi Arabia actively seeks alternative export routes to ship oil and relieve global supply strains caused by the conflict with Iran.
• Simultaneously, Iran has escalated its maritime operations. To sustain pressure on the Strait of Hormuz despite having its primary radar infrastructure destroyed by US strikes, Tehran adapted its strategy by relying on unarmed spotters to maintain surveillance and target identification for the Islamic Revolutionary Guard Corps. This tactical pivot has driven the sharpest increase in commercial tanker attacks since the war began in February.

• Iran and its partners are escalating attacks, adding to upward pressure on oil prices and weighing on US voter sentiment. However, the US oil market has been relatively sheltered from the disruption. WTI is trading at a substantial discount to its competitors, reflecting domestic supplies’ lower direct exposure to shipping risks in the Middle East. Meanwhile, US exporters still face soaring freight costs, making their crude more expensive to deliver overseas and helping sustain that discount.
• The recent escalation in the Middle East may reflect Iran’s desire to pressure the White House ahead of the midterm elections. Tensions could ease after the vote, when Tehran has a clearer sense of its negotiating leverage. Such an outcome would likely support US equities, but foreign markets, particularly those more exposed to higher energy costs, could offer greater upside if oil prices retreat.

Forward Guidance? While Fed Chair Kevin Warsh has been reluctant to offer insights into the central bank’s next moves, other FOMC members have been more vocal. On Tuesday, New York Fed President John Williams stated that he does not see a need for a rate hike in 2027. His remarks suggest that the rate-hiking cycle may be significantly shorter than markets currently price in. If so, this could provide much-needed relief for bond markets, which are presently under pressure on multiple fronts.

• Williams explained that while he has not ruled out another rate hike this year, he sees a path for inflation to decline next year. He noted that inflation could ease significantly toward the Fed’s 2% target as the effects of tariffs and energy shocks begin to roll off. This cooling, along with easing stress in other areas, should help offset price increases driven by the ongoing AI buildout.
• Williams’ commentary on the rate path follows similar remarks from other Fed officials. Cleveland Fed President Elizabeth Hammack, a voting member this year, advocated for returning interest rates to restrictive territory to contain inflation. Meanwhile, Richmond Fed President Tom Barkin, an alternate voter this year who becomes a full voting member next year, also maintained that monetary tightening could occur before the end of the year.

• Expectations surrounding Federal Reserve policy remain a primary driver of rising long-duration bond yields. The Fed’s more hawkish posture has significantly influenced long-term rates, helping push the 10-year Treasury yield to its highest level since 2002. Since the Fed’s September FOMC meeting, at which officials raised rates for the first time since 2023 and the dot plot signaled at least one further hike this year, the 10-year yield has risen roughly 30 bps.
• Although Chair Warsh has been reluctant to offer forward guidance, markets have been able to read signals from the rest of the committee. This increased communication could reduce some of the volatility in the bond market. That said, recent remarks from Fed officials suggest they still favor at least one more hike, while the path in 2027 remains uncertain. Signs of dovishness could weigh on bond yields over the coming months.

Fed Pressure: Fed Governor Lisa Cook will not attend a November 5 White House hearing on allegations of mortgage fraud. Her attorney said that Cook will be in Europe that day on official business at financial and monetary policy meetings, and any hearing would need to take place no earlier than the conclusion of the December 8-9 FOMC meeting in order to allow time to prepare. The inquiry is the White House’s latest attempt to remove Cook from the Federal Reserve Board; so far, she has not been charged with a crime.

Ukraine Ceasefire: German Chancellor Friedrich Merz and Ukrainian President Volodymyr Zelenskyy have requested that Russia agree to an energy truce. The move follows US President Donald Trump’s announcement of a diesel deal with Russian President Vladimir Putin, which included an agreement that Russia and Ukraine would refrain from attacking each other’s energy infrastructure. However, the deal quickly collapsed when neither side formally acknowledged the arrangement, leading Russia to strike a Ukrainian oil refinery and prompting Ukraine to retaliate in kind.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an overview of the International Monetary Fund’s latest forecasts for global economic growth. We next review several other international and US developments that could affect the financial markets today, including an update on the war in Iran and a comment from a major US semiconductor leader that appears to be putting downward pressure on artificial intelligence stocks.

Global Economy: The IMF said in its latest World Economic Outlook today that global gross domestic product should increase 3.1% in 2026, up from its previous estimate of 3.0%, in part reflecting investment related to artificial intelligence. The IMF figures show global GDP growth will accelerate to 3.4% in 2027. All the same, the organization warned that government budget deficits in the advanced countries will likely rise to 5.2% of GDP this year, the highest level since the coronavirus pandemic and enough to threaten financial stability.

United States-Israel-Iran: According to The Wall Street Journal this morning, the Iranian government is actively rebuilding its defenses, rallying its citizens to resist new attacks, and warning US allies in the region that it will unleash a wider, harsher response against them if the US renews its attacks on Iran after the midterm congressional elections. The preparations are reportedly aiming to deter the US and Israel from renewing their war. Meanwhile, new reports say Iran attacked six commercial ships in the Strait of Hormuz on Sunday alone.

• If the US and Israel escalate again anyway, the Iranian preparations may mean that bigger and longer-lasting attacks may be necessary before they can force an Iranian surrender.
• In any case, the Iranian preparations and the renewed surge in attacks on shipping in the strait serve as the latest evidence that the war is likely to continue for some time, as neither side appears to have the ability to enforce its will on the other.

US Artificial Intelligence Industry: Hock Tan, the chief executive of AI semiconductor giant Broadcom, said at a conference yesterday, “A lot of investors [in artificial intelligence] have no clue what they are investing in … They set very extreme expectations only to find out that it’s almost like they are in a casino.” The statement, which was seen as undermining the current AI investment frenzy, apparently helped push down technology stock prices yesterday. So far today, the sell-off has continued in Asia and is threatening to continue in the US as well.

US Banking Industry: Several major banks kicked off the third-quarter earnings season today, with JPMorgan Chase, Goldman Sachs, Wells Fargo, and Citigroup all reporting higher profits than a year ago, although some of the firms failed to beat analyst expectations or match their strong second-quarter growth rates. Importantly, the firms generally expressed cautious optimism about the US economy despite rising interest rates.

European Union: Dutch TTF gas futures, a European benchmark, today rose to 86.79 EUR ($97.15) per megawatt hour, marking their sixth straight daily increase and hitting their highest level since shortly after Russia launched its invasion of Ukraine in 2022. The jump in prices stems in part from Europe’s seasonal gas stockpiles being at only 74% of capacity, versus a normal level of 90% at this time of year. On top of that, prices have risen in response to a cold snap in Central Europe and concern over US policy related to Russia and Ukraine.

France: The government yesterday said it will invest 500 million EUR ($560 million) in miner Eramet to shore up the firm’s finances and protect French access to critical minerals. The agreement will boost the state’s stake in the firm from the current 27% to 49% when the deal closes. The group has nickel operations in Indonesia as well as historic concessions in New Caledonia, a French territory. It also produces lithium, manganese, and mineral sands in Argentina, Gabon, Senegal, and the US. The move highlights the priority nations now put on ensuring supplies of key materials.

Indonesia: This coming Sunday, the government is expected to introduce some of the world’s toughest halal rules, which will require firms selling everything from clothing and cosmetics to toilet paper and office supplies to demonstrate that their products are permissible under Islam. While foreign companies see Indonesia and its massive population of 280 million as an attractive market, the labeling rules are expected to be a hurdle for those trying to export to the country. The new rules could also complicate production processes within the country.

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