ORLANDO, Florida (Oct 8): Stocks mostly fell on Thursday, with US tech and AI chalking up notable losses as worries intensified over the AI revolution's profitability. Oil prices rose sharply, shrugging off a pledge by US President Donald Trump not to attack Iran before the November 3 US midterm elections, while a slide in long-dated US bond yields also failed to give equities much support.
In my column today, I highlight five charts that show how stretched US stocks and bonds markets are, suggesting they are at, or close to, an inflection point.
US tech and AI stocks sank on Thursday after the FT reported that OpenAI's annualized revenues are $20 billion lower than the $70 billion previously signaled. It appears that there is a difference between how OpenAi and Anthropic book revenues in their accounts, which goes a long way to explaining the discrepancy.
However, it also gets to the heart of investors' concerns about the AI buildout, namely the borrowing, off-balance sheet debt, circular financing, and ultimately, future returns. With trillions on the table, and stock prices and concentration at record highs, markets are vulnerable to reports like this. Especially regarding OpenAI which, along with Anthropic, is one of the most important parts in the whole AI story.
Thursday's US 30-year bond auction wrapped up a week that saw Treasury sell nearly $120 billion of 3-, 10- and 30-year debt. The long bond sale cleared at 5.618%, reportedly the highest since 2000, but demand was strong - the bid/cover ratio of 2.54 was one of the highest in the last decade, primary dealers' takedown was low, and indirect bidders - a proxy for foreign central banks - took up a high share.
Overall, this week's sales went much better than the 2-7 year auctions two weeks ago, in which the 5-year sale was particularly bad. The highest yields since the 2000s attracted buyers, and the question now is whether the selloff is over. Some market participants on Thursday mischievously pointed to the front cover of The Economist, sometimes seen as a contrarian indicator, as a signal that it is. The latest cover asks the question: 'Will bonds blow up?'
Were it not for President Donald Trump's tariffs, US consumer goods' prices would have fallen. As it was, however, they rose due to the tariffs, which had added nearly 3 percentage points to goods price inflation as of February this year. So says the authors of a New York Fed paper published this week, in which they studied a sample basket of 67 goods.
The good news? The pass through has likely faded by now and base effects mean the tariff contribution will be negative through the middle of next year. Among the other takeaways, around a quarter of a tariff increase is passed through to goods prices, although the indirect effect on goods made in the US takes longer to materialize, so the full effect of a tariff takes about a year to appear.
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