Hot US inflation hits the Nasdaq as chips slide and defensives rally

• US: The S&P 500 ended 1.11% lower at 7,718.94 and the Nasdaq Composite lost 1.88% to 26,692.87. The Dow slipped only 0.09% to 51,621.48. Selling picked up through the afternoon, and the S&P finished close to its low for the day.
• Europe: Markets there closed before most of the US damage. The FTSE 100 rose 0.70% to 10,724.86, the CAC 40 gained 0.58%, the Euro Stoxx 50 0.38% and the DAX 0.15%.
• Asia: The Nikkei fell 1.86% and Taiwan 1.37%. Shanghai lost 0.79% and the Hang Seng edged up 0.18%. The Kospi ended at 6,008.81, its sixth straight loss, and is down 9.31% over five sessions.

This morning's question was whether September's inflation figures would be hot enough to make a rate rise at the Fed's meeting on 28 October a real possibility. They were. Consumer prices rose 0.6% in the month and 3.7% on the year, against 3.6% expected and up from 3.4% in August. Petrol prices jumped 9.1% in September and accounted for more than half of the monthly rise, a direct result of crude prices driven up by the war. Brent finished at $105.93. The core measure, which strips out food and energy, matters more for the Fed: it rose 0.3% against 0.2% expected, and 2.6% on the year. Chicago Fed President Austan Goolsbee called the reading discouraging, and traders sharply raised the odds of a rate rise this month.

The simple story that higher yields sank tech did not survive the close. The 10-year Treasury yield briefly topped 5.3% after the release, then reversed to finish 2.7 basis points lower at 5.19%. The 30-year yield fell 3.8bp. Only the 13-week bill yield rose, by 2.8bp. Short-dated yields track expected Fed policy, so they priced in tighter money. Long-dated yields fell because the market expects rate rises to slow growth, the classic late-cycle trade.

The Nasdaq's slide is better explained by rate-rise fears landing on a chip trade that was already fragile. Renewed doubts about AI spending, plus an ASML sales outlook that disappointed, had already hit Asian chip-heavy markets overnight. The US Technology sector lost 2.98% while Health Care gained 2.53% and Consumer Staples 2.22%. Those defensive gains, plus a lighter tech weighting, explain why the Dow held up.

Investors retreated rather than panicked. The VIX, Wall Street's gauge of expected share-price swings, jumped 10.48% to 16.87 but is still 52% below its 52-week high. The MOVE index of bond volatility actually fell 2.0% to 99.06. The gap between the best and worst US sectors, more than five percentage points, shows how narrow the selling was. Investors sheltered in the dollar, not gold. The dollar index rose 0.35% to 102.54, within 0.4% of its 52-week high, while gold fell 1.35% to $4,121, because higher expected US rates make an asset that pays no interest less attractive. Our own European breadth count was evenly split, with 1,635 risers against 1,598 fallers. Asia was clearly weaker, with 4,582 against 6,982.

The September CPI figures were released at 08:30 ET today, and they are the day's macro story. Headline inflation rose 0.6% on the month and 3.7% on the year. Core inflation rose 0.3% on the month and 2.6% on the year. Both beat forecasts, and petrol up 9.1% in the month was the largest single contributor. Nothing else of comparable weight was scheduled after the close. Attention now turns to how Fed officials react before their decision on 28 October.

The big US banks gave a split verdict. Bank of America earned $0.91 a share against $1.11 expected, cut by a $1.2bn regulatory settlement charge, and the shares fell. Morgan Stanley ($3.03 against $2.92 expected) and BlackRock ($15.93 against $14.30 expected) both beat. ASML beat profit forecasts by about 10% and said planned 2027–28 supply will not meet demand, but its shares still fell. Investors had expected a lot, and part of the profit came from a one-off gain on the value of its stake in Mistral AI.