Fed slows, Europe under pressure: markets split on rates, energy, and AI
Between late September and early October, financial markets exhibited two very different speeds. In the United States, softer macroeconomic data reduced fears of another immediate rate hike, allowing stocks to recover ground. In Europe, by contrast, accelerating inflation, pressure on energy prices, and tensions over French debt kept volatility high. In the background, oil prices above $100 and the rush to invest in artificial intelligence continued to push markets and expectations in opposing directions.
The Fed can afford to wait
The first sign of easing came from US inflation. The August PCE, one of the Federal Reserve's most closely monitored indicators, grew by 3.4% year-on-year , less than expected. This figure remains significantly above the central bank's target, but it reduced the urgency of further tightening at the October meeting.
This view was reinforced by the labor market report. In September, the US economy created just 29,000 jobs , compared to the 90,000 economists had expected. The slowdown in hiring, accompanied by less worrying wage growth, led investors to quickly scale back expectations for a further Fed Funds hike. Several Federal Reserve officials also emphasized that more data remains to be analyzed before the end-of-month decision, reinforcing the possibility of a pause in the tightening cycle.
The stock market reaction was immediate. On Friday, the Nasdaq gained 1.19% , while the S&P 500 rose 0.73% . Growth sectors, which are particularly sensitive to the cost of capital and the future trajectory of bond yields, benefited most from the shift in expectations.
Europe: Energy brings inflation back to the forefront
Across the Atlantic, the situation appears more challenging. Eurozone inflation accelerated to 3.8% , driven in particular by rising fuel, natural gas, and food prices. Among major economies, Italy recorded a rate of 4.1% , while in France, harmonized inflation reached 3.4% .
The European problem lies primarily in the nature of the shock. Rising energy prices are coming from outside and are hitting economies heavily dependent on fuel imports. The ECB must therefore simultaneously contend with accelerating inflation and already restrictive financial conditions, while further rate hikes would increase the cost of credit for households, businesses, and governments.
This combination was reflected in stocks. On Thursday, the STOXX 600 lost 1.3% , falling to its lowest level in nearly three months. The pressure was particularly evident in financial stocks, while technology and semiconductor stocks showed greater resilience thanks to persistent demand for artificial intelligence.
France, bonds and the euro under pressure
The weakest point in the European bond market remains France. Concerns about the deficit trajectory, debt, and the ability to implement the fiscal consolidation envisaged in the budget have pushed up the premium investors demand for holding French bonds. The spread between the 10-year French bond and the German Bund has reached approximately 131 basis points , the highest level since 2012.
The situation is delicate for the ECB. The tools created to protect the transmission of monetary policy can be used in the event of movements deemed unjustified and disorderly, while the market attributes part of the rise in French yields to actual fiscal risks. Therefore, direct intervention is not considered automatic.
Tensions have also spilled over into the currency. The euro fell below $1.1215 , hitting its lowest level in nearly seventeen months. The dollar continues to benefit from high U.S. yields and the greater resilience of the American economy, while Europe is suffering more from rising energy prices.
The weakness of the single currency also risks amplifying the problem: oil, gas, and many raw materials are traded in dollars, so a weaker euro further increases the cost of imports.
Oil above one hundred dollars
Energy remains a major driver of volatility for the entire market. The November Brent crude contract closed Wednesday at $103.50 a barrel , completing a 14% monthly gain. Prices were supported by the stalemate in negotiations between the United States and Iran and persistent tension in the refined products market.
For investors, oil now affects multiple variables simultaneously: it increases inflation expectations, limits central banks' ability to ease monetary policy, compresses household disposable income, and weighs on the margins of energy-intensive industries. It is precisely this link between energy and interest rates that makes the European scenario more vulnerable than the US one.
Artificial intelligence continues to prop up Wall Street
Amid macroeconomic pressures, the artificial intelligence theme continues to produce very strong corporate results. Micron forecast quarterly revenue of $61.5 billion and announced customer commitments through long-term supply agreements worth $32 billion . Demand for the high-performance memory needed for data centers continues to outstrip available capacity.
Hewlett Packard Enterprise also reinforced this narrative, announcing a $1.2 billion order from Vultr for servers for AI workloads. This signals continued growth in digital infrastructure investments despite rising capital costs.
Two increasingly divergent markets
The sessions between Wednesday and Friday thus revealed an increasingly sharp divergence. In the United States, the slowdown in inflation and employment is allowing the Fed to consider a pause, particularly supporting technology and growth stocks. In Europe, however, energy, inflation, and fiscal tensions are keeping bonds, banks, and the euro under pressure.
The key variable remains the cost of capital. If pressure on yields begins to ease, equities could find new traction; however, if oil prices and inflation remain high, central banks' room for maneuver will remain limited. Meanwhile, AI continues to represent the main growth driver capable of counterbalancing a still extremely challenging macroeconomic environment.