ECB, BoE decide, US reveals CPI

Market sentiment is weak after Tuesday’s US jobs data failed to spark optimism for more Federal Reserve (Fed) cuts next year, and the AI selloff intensified yesterday on two major developments that aggravated investors’ concerns about circularity and leveraged-debt risks.

First, Amazon is reportedly in talks to invest $10bn in OpenAI. In return, OpenAI would buy Amazon’s homegrown Trainium chips — a deal reminiscent of its recent contract with Nvidia, which raised questions about circularity, contagion risk, and marked the start of waning AI enthusiasm.

Second, Oracle said that negotiations for an equity deal for a Michigan data center project did not include Blue Owl Capital, and that its development partner had instead chosen “the best equity partner from a competitive group,” without specifying who that partner is. The suspense is forcing investors to reassess who is actually backing the project and how secure the funding is — especially given spiking credit default swaps, which suggest rising fears of default tied to Oracle’s leveraged projects, one of which was recently delayed due to labour and material shortages.

The result: Oracle’s share price dropped another 5%, bringing its total loss since the September peak to 45%. Nvidia fell 3.8%. Amazon was down 0.58%, a disappointing reaction compared with Google’s jump weeks ago after Meta announced it would use Google’s TPUs. Even Google — outside the OpenAI-Nvidia circle — fell more than 3%.

Perhaps it is happening: the AI bubble may be deflating. How far the selloff will go remains unclear, but high valuations could justify a 10–20% drop from peak to trough, implying the Nasdaq could fall below 21’000. Not the Season Finale investors had hoped for after a strong year.

The good news: Micron’s earnings lifted tech sentiment after the bell, with both revenue and profits beating forecasts as demand for memory used in data centers and AI applications stayed strong. The results confirm that the memory cycle recovery is gaining traction, supported by tight supply and rising prices, reassuring investors that Micron is benefiting from the AI spending boom.

Nasdaq futures are trading higher this morning as attention shifts back to economic data, with the US set to release the first CPI figures since the government shutdown.

As an economist, I note that today’s inflation data is a key driver of Fed expectations. Inflation remains sticky and above the Fed’s target, making a 1% Fed rate — as Donald Trump has advocated — unrealistic without risking a spike in prices for Main Street. Normally, a weakening jobs market helps tame inflation because lower incomes reduce spending. But tariffs complicate the jobs-inflation equation: if tariff-driven inflation materializes, demand could fall enough to control inflation. The latter would require a severe hit to the labour market. This is why markets have been closely monitoring US jobs data: its resilience could shift attention back to inflation.

Interpreting inflation data is straightforward: softer figures should keep Fed-cut bets alive, supporting equities and bonds and weighing on the dollar, while stronger-than-expected data would threaten dovish Fed expectations, weighing on equities and bonds and boosting the dollar. The dollar index is slightly higher ahead of the data, the EURUSD is flat and Cable is under pressure ahead of European Central Bank (ECB) and the Bank of England (BoE) decisions today.

The ECB is expected to keep rates unchanged. ECB Chief Christine Lagarde is likely to reiterate that policy is appropriately positioned and that the committee will continue monitoring data. The base case is no change today or next year.

The BoE faces a tougher backdrop: UK growth is weak, productivity gains are minimal and budget pressures persist. Inflation has begun easing, but remains above the BoE’s target (~3%), likely heading toward 2% by next spring. A rate cut today, with a dovish statement, would keep sterling under pressure.

In summary: the Fed’s dovish pricing will be tested by today’s CPI, the ECB is unlikely to offer surprises and the BoE could be more dovish than expected. The US dollar could strengthen, sterling remain under pressure, and the euro may follow broader trends.

Tomorrow, the Bank of Japan (BoJ) concludes the global policy dance with a widely anticipated rate hike. Japanese 10-year yields are just below 2%, pressuring other DM yields higher and further weighing on risk sentiment.

Happily, Fed’s repo purchases are rising, offering some comfort to risk investors.