Hot inflation, cold jobs and split bank earnings
Did U.S. inflation go up in September?
Wednesday's Consumer Price Index data was the last U.S. inflation reading before the U.S. Federal Reserve (the Fed) has its next interest rate meeting and before the mid-term elections, and it ran hot. Prices rose by 0.6% in September, lifting the annual rate to 3.7% from 3.4%, above the 3.6% expected. Core inflation (not including food and energy) climbed to 2.6% from 2.4%, also above forecast. Gasoline accounted for much of the increase, rising by about 7% on the month. The bigger point is that the pressure is spreading beyond the pump.
That changes the October math. After weak U.S. payroll data two weeks ago, a Fed rate increase this month looked unlikely. Now it’s back on the table, two weeks before the Fed makes its decision. The 10-year Treasury yield jumped by eight basis points (0.08 percentage points) to 5.3%.
Equity sell-offs showed where the vulnerability sits. The Nasdaq fell by 1.9%, its worst day since July, and nearly three in four U.S. stocks declined. The hardest hit were stocks in AI infrastructure companies that have borrowed heavily to build: CoreWeave fell by more than 15%, Nebius fell 10%, and Oracle fell by nearly 9%. When rates rise, the market punishes companies that are financing growth with debt. Credit markets flagged that pressure two weeks ago. Equities are now catching up.
How did U.S. banks perform this quarter?
Earnings season opened Tuesday with a clear divide. Goldman Sachs beat earnings expectations by roughly 30%, earning $17.01 a share, as its equities trading revenue jumped by 72% to $6.44 billion. Citigroup also beat expectations. However, JPMorgan posted a rare miss at $5.57 a share (weighed by a securities loss and a 4% drop in fixed-income trading), and Wells Fargo slid by about 3% due to weak revenue.
The split ran through the trading floor. Stock trading desks thrived on volatility and heavy client activity. Bond-trading desks lagged in a year when interest rates have moved hard against bondholders.
The more telling part came from JPMorgan CEO, Jamie Dimon. He cut buybacks to $664 million in the quarter and warned that large deficits, sticky inflation, elevated asset prices and rising rates keep shifting under the surface. A bank that buys back less of its own stock while flagging elevated asset prices is telling you how it sees valuations.
What happened to Canadian jobs?
Last Friday's Canadian jobs report was a shock. Employment fell by 68,300 in September against an expected gain of about 9,000, following a loss of 41,700 in August. Unemployment rose to 6.5%, and every job gain this year is gone. Quebec took the biggest hit, losing 49,000 jobs. Most losses came from the public sector, health and education (tied in part to fewer international students), while trade-exposed manufacturing lost about 13,000 jobs. Tariffs are not the main culprit yet.
Before the report, markets priced roughly a one-in-four chance of a Bank of Canada rate increase. That talk is gone for October. So, on October 28, the two central banks will decide on the same day with opposite instincts: the Fed will reconsider a rate increase after Wednesday's inflation report, while the Bank of Canada will feel that it’s lost its case for one. The loonie is already reflecting that gap, down to almost US$0.70 from about US$0.72 a month ago. And on Wednesday, the S&P/TSX Index fell by 1.1%, as materials stocks (which include gold) dropped by 4.3%. A Fed that is leaning toward rate increases can affect Canadian portfolios through commodity prices as much as through interest rates.
What market data is due next week?
Next week will bring Canadian Consumer Price Index data, the last inflation read before the Bank of Canada decides on whether to increase its interest rate, while earnings season will broaden beyond the banks. After a week when U.S. inflation ran hot and Canadian jobs ran cold, the question is how far apart two central banks can drift before the currency does the adjusting for them.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
