Markets split between an AI breakthrough and surging bond yields
How did Meta's new AI app move the stock market?
Meta's personal AI agent, Muse, launched on September 8 and has already overtaken ChatGPT as the top free app in the U.S. and Canada, with 2.8 million downloads in two weeks. On Monday, Meta's stock jumped by 11%, its biggest day since April 2025, adding roughly $192 billion in value. Chip and semiconductor companies tied to AI workloads followed suit, with Arm Holdings up by 17%, Intel up by 12% and AMD (Advanced Micro Devices) up by 10% (which lifted the company's value past $1 trillion).
On Tuesday, a more negative trade arrived. A Goldman Sachs trading note argued that AI agents that can compare prices, book trips and handle customer service are a threat to any business process built on customer passivity, such as recurring bills, auto-renewals and add-ons. The market took this thesis literally: financial companies in the S&P 500 fell by as much as 2.4% to their lowest level since July, Planet Fitness dropped by 11%, Allstate and Charles Schwab fell by more than 5%, and Booking.com and Expedia kept sliding into Wednesday.
In July, Meta was punished for the cost of its AI growth; this month it was rewarded for a new product. And the market is pushing up the prices of secondary AI companies before a single quarter of usage data exists. Things move fast in the world of AI.
Why did bond yields reach 2007 levels?
The 10-year U.S. Treasury yield touched its highest level since 2007. The 30-year yield reached 5.37%
Three forces lined up in a single session. Flash PMI data (an early estimate of manufacturing activity) showed that U.S. business growth was accelerating at its fastest pace since July 2021, with manufacturing at 57 against the expected level of 53.6, and input costs rising on energy. U.S. Federal Reserve (the Fed) Governor Michael Barr said further interest rate increases are needed to bring down sticky inflation. And Brent crude oil climbed back above $100 per barrel, helped by President Trump's support for a ban on U.S. diesel exports. Odds on an October rate increase jumped to about 70%.
A week ago, the question was whether one rate hike would become a cycle, and we were saying here it almost never happens like this. The market is now waking up to this reality. Strong growth plus hot input costs give the Fed both the reason and the room to increase rates. The 30-year mortgage rate in the U.S. rose above 7.2%, the highest of President Trump's second term, and stocks fell, with consumer names leading. Software (which was the exception) gained.
What will the widening gap between Canadian and U.S. rates mean for the loonie?
Bank of Canada Governor, Tiff Macklem spoke on Monday about a rebound in exports, investment and hiring, and more Canadian exporters looking beyond the U.S. He also sounded firmer on inflation, but the currency shrugged. The loonie slid to a seven-week low near 71 U.S. cents, with the U.S. dollar climbing from C$1.38 on September 9 to C$1.41 this week, as the gap between U.S. and Canadian yields widened.
This gap is the divergence we have tracked all summer. The Fed is hiking into a strong economy. The Bank of Canada's policy interest rate sits at 2.25%, and core inflation is near 2%. A widening rate gap pulls capital south, and oil alone is no longer enough to hold the Canadian dollar up. The S&P/TSX (the index of Canada's largest companies) swung through it, gaining 326 points on Tuesday (its best day in weeks) but then fell on Wednesday, as banking and mining companies slid.
What's coming next for the markets?
After a week when one app repriced entire industries, and yields returned to 2007, the question is, which will move faster from here, the technology or the cost of money?
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
