A tug of war between inflation and AI

Hi, and welcome to Market Week in Review for the week ending October 16, 2026. I'm Paul from Investment Strategy at Russell Investments. This week, I think there were two dominant themes that created a tug-of-war for attention across markets. First, we had hotter U.S. inflation data that, at least very briefly, pressured interest rates higher. We also saw growing concerns around the artificial intelligence trade. Net-net, it seemed like risk aversion around AI concerns dominated. Into Thursday's close here in Seattle, equities were trading down modestly and Treasury yields were declining, despite the hotter inflation readings. Starting with the macro and inflation data, we had U.S. consumer and producer price inflation numbers for September. Both came in hotter than expected. We're now tracking core PCE inflation, the number the Fed cares about, at roughly 3.1% year over year through September. The numbers have been stubborn and sticky at those levels for most of 2026. That's had the Fed's attention and is part of why it raised rates at its most recent meeting in September. I think the open question now is less about whether the Fed will hike again and more about when, with the door open to a hike at its meeting at the end of this month or at the next FOMC meeting in December. We shouldn't have to wait long for that. We're recording this on Thursday in Seattle, and in just a couple of hours, Chairman Kevin Warsh will be giving a talk at the IMF-World Bank meetings later this evening. It's possible we could get more guidance from him about near-term policy intentions. So, that's the inflation side. As I mentioned, the other big issue this week was artificial intelligence, and some old questions resurfaced around the AI trade. I think, in particular, the question is whether investors are seeing enough return on the very large capital investments being made in the AI buildout. Second, particularly as interest rates have moved up over the last quarter, some investors are starting to scrutinize high debt levels and greater financing risks for the most leveraged names within this AI buildout. Bottom line, asset prices did respond negatively to these questions and concerns through Thursday. The Nasdaq 100 Index was down about 3%. The Philadelphia Semiconductor Index was down about 8%. Other concentrated AI exposures globally, like South Korea's KOSPI Index, were down almost 16% this week. There was some selling pressure. Again, a bit of a tug-of-war in fixed income markets. You'd normally think hotter inflation data would drive Treasury yields higher, but they actually declined pretty notably this week amid a flight to safety and risk aversion around AI. The 10-year U.S. Treasury yield, for example, was down about 16 basis points this week, which is a pretty punchy move. I just want to wrap up by saying we're now only a couple of weeks away from the U.S. midterm elections, which will take place on November 3. Our teams published an article this week capturing how we're thinking about midterms as an event risk for financial markets. The very short version is that Democrats are expected to gain one or both chambers of Congress, which would leave us with a pretty gridlocked Washington, D.C. That means more material legislative change seems pretty unlikely over the next two years. That would leave in place a status quo and policy mix that's pretty favorable for U.S. financial markets. Ultimately, we think investors should stick with their plan and stay invested through this political event. I encourage you to check out the article. We go through some of the key points and also feature the AI data center buildout, which has become an increasingly political and bipartisan issue of interest for voters across the U.S. right now. We dig into that in the piece. That's all for this week. Thanks for tuning in. We hope to see you again next time. Bye.