Last week, risk assets drifted lower, with the S&P 500 index closing down by 0.64%, driven primarily by weakness in the technology sector. Fixed income also faced challenges, as Treasury bond yields rose by approximately 15 to 20 basis points, and credit spreads widened by 1 to 8 basis points overall.
The underperformance in tech equities was led by Nvidia, whose stock dropped nearly 6% for the week. This decline followed news that the U.S. government is preparing rules to cap the sale of advanced AI chips in regions such as Southeast Asia and the Middle East. These measures aim to limit China’s access to computing power hosted in other countries.
In contrast, market sentiment on the U.S. economy was shaped by the release of key inflation data. The Consumer Price Index (CPI) aligned with expectations, though the 2.7% annual rate remains above the Federal Reserve’s 2% target. Meanwhile, the Producer Price Index (PPI) came in higher than anticipated, prompting markets to reassess the likelihood of rate cuts toward the end of the current easing cycle.
Looking ahead, the Federal Reserve’s meeting this Wednesday is the primary focus. A 25-basis-point rate cut, bringing the federal funds rate to 4.50%, is largely priced in. However, given the recent inflation data and the resilience of the labor market, markets are now pricing in a terminal rate of 3.875%, up from approximately 3% just a few months ago.
