Wall Street Dialogues: Rate Hikes Calm Down and Fear of AI Surge Begins in Markets

Journalist: The tantrum of the bonds has calmed down. Is it replaced by the fear of AI exuberance? Today, the punishment in semiconductors was very harsh. Samsung fell 7%. SK Hynix, 10%. Last week, it was time to worry about OpenAI's revenues and the opacity of funding for the gigantic AI projects. We came out of one tangle, are we getting into another worse one?**{#p-1791936507091-54113}

Gordon Gekko: Look, there is no need for that. Bonds can take a well-deserved break after all the turmoil they had to go through. One would expect that deactivating the risk of a nervous collapse would reduce the chances of an accident. And not that it would clear the way for the danger that remains on the list to explode. In principle, getting out of such a complicated tangle is the best way to avoid a chain reaction.{#p-1791936507091-91199}

P.: The Nasdaq and the S&P 500 set new records in their last sprint, but based on a tiny number of companies. All linked to the AI boom. It is fashionable, for that reason, to weigh the risk of excessive concentration. What can we expect? That the base widens or that the thread breaks at its thinnest?{#p-1791936507091-39635}

G.G.: Let the balances answer that. Today the official season began with the banks' numbers. If expectations are met, and if rates calm down, I would expect a greater participation intensifying towards the end of the year. We came from a correction in the stock market in September (a month that usually brings us these mishaps) that was conveniently masked by the AI boom. Has it been digested? We do not know, but it should not take much longer. The economy looks healthy and on the rise. Its strength is not concentrated in a handful of activities as the stock rally is. Despite the cost of energy, despite the dizzying rise in interest rates. Let the balances deny it if it is not so. Or let them indicate the sectors and companies where there is a deterioration.{#p-1791936507091-10200}

P.: The banks are the ones in charge of kicking off the season. And they arrived with their stocks on a full slide: with a 9% drop last month, measured by the KBW index. As you say, they have already suffered a textbook correction. Today we saw a strong parade of large institutions -- JPMorgan, Wells Fargo, Citigroup, and Goldman -- presenting their reports. What is the balance?{#p-1791936507091-12788}

G.G.: All of them increased their figures, although JPMorgan fell short of the improvement that was expected. The anticipated drop in prices has a known logic behind it. The trading and issuance boom of the second quarter was not repeatable. And in September, business cooled down quite a bit. What they all recognize, however, is a resilient economy with robust investment and a consumer that continues to spend.{#p-1791936507092-21519}

P.: It is so, but they still march imprisoned. The KBW index fell another 1.40%.{#p-1791936507092-88897}

G.G.: What improved is the valuation, which I remind you was until not long ago the favorite complaint. As long as it is so, the bull market is not in danger.{#p-1791936507092-60967}

P.: What calmed the long rates? That the Fed has come out to clarify that the rise in fed funds is not in a hurry?{#p-1791936507092-27103}

G.G.: That is not a minor detail. You cannot leave the bonds in charge of monetary policy. That was a serious mistake by Kevin Warsh that the Fed, as a collegiate body, seems to have corrected.{#p-1791936507092-17745}

P.: A rookie mistake.{#p-1791936507092-14935}

G.G.: Or of someone who wants to please both God and the devil, improvises by taking a shortcut, and manages to delay a difficult decision, but soon gets tangled up.{#p-1791936507092-64573}

P.: This mistake has already been corrected.{#p-1791936507092-5935}

G.G.: That is the message, still unofficial. Bonds can kick and scream all they want, but the Fed will make decisions by examining economic data without rushing. It will not validate the market hysteria.{#p-1791936507092-87296}

P.: As was usual before Warsh.{#p-1791936507092-40357}

G.G.: Correct.{#p-1791936507092-50890}

P.: Is the entire rise in long-term rates a manifestation of hysteria?{#p-1791936507092-39686}

G.G.: In principle, only what was skimmed off so easily.{#p-1791936507092-78974}

P.: Do you think we have already seen the worst of the rise?{#p-1791936507092-54982}

G.G.: If Brent crude skyrockets to $120 a barrel, probably not.{#p-1791936507092-66083}

P.: So it depends on Trump...{#p-1791936507092-18638}

G.G.: In the short term, yes. In August, the president and the Treasury secretary said they had an imminent agreement with Iran. They were very concerned about a barrel around $80 close to the elections. Now they tolerate it costing $100 even though we are about to vote. After the elections, what will the limit be? At some point, oil companies will have to convince them that they can cause a catastrophe.{#p-1791936507092-32775}

P.: As they did in June when Trump signed the memorandum of understanding with Iran.{#p-1791936507092-52639}

G.G.: Exactly.{#p-1791936507092-38580}

P.: And in the longer term? Do you think the rise in fed funds will calm the frenzy of the long end of the curve?{#p-1791936507092-63811}

G.G.: The third party in discord is the AI boom. We do not know how much momentum it will have.{#p-1791936507092-69472}

P.: John Williams, the president of the New York Fed, was the first voice to point out that the Fed was not in a hurry to raise rates. And now he says there will be one last increase before the end of the year and that he does not think any will be needed in 2027. Did we go from eliminating forward guidance to the other extreme? Are we going to an incredibly detailed description of the roadmap?{#p-1791936507092-42898}

G.G.: If Williams speaks alone, it is not so. If he has company, if more voices join in, then it can be considered a possibility.{#p-1791936507092-68843}

P.: What do you think?{#p-1791936507092-65870}

G.G.: Two of the three dissenters from July, those who already wanted to resume rate hikes then, seem too eager to agree with what Williams proposes. Lorie Logan from the Dallas Fed is ready to trigger this month and in December. She wants half a point already. Beth Hammack from the Cleveland Fed is ready to repeat more than once, although she might skip a meeting.{#p-1791936507092-56808}

P.: How representative is Williams' position, then?{#p-1791936507093-84048}

G.G.: A tweak in December should be the consensus. Not doing anything in 2027, that concrete alternative, we do not know.{#p-1791936507093-65664}

P.: Isn't that what the dot plot suggests for next year?{#p-1791936507093-79335}

G.G.: The dot plot only shows the recommendation for December 2027. And indeed, that rate is the same as at the end of 2026. But this does not exclude the possibility that someone thinks about the need to make more rate hikes, say in the first half of the year, and then reverse them.{#p-1791936507093-36022}

P.: The dot plot has a dark area where it does not provide the information that Williams gives us...{#p-1791936507093-18992}

G.G.: That's right.{#p-1791936507093-66478}

P.: And why do you think Williams is so explicit? It is not what is customary.{#p-1791936507093-14832}

G.G.: If one wanted to calm the bonds, this would definitely be an effective way. Although it is clear that this is not a firm commitment. Concrete decisions will depend on the state of the economy in 2027. Williams anticipates a pronounced decline in inflationary pressures. But if the AI boom persists, the path of fed funds will be a staircase that will need to keep adding steps next year.

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