Morgan Stanley: Technology stocks fall as Treasuries rise; oil prices and central-bank tightening expectations move global markets

Why did falling technology stocks lift Treasuries?

Technology companies’ earnings deepened investors’ questions about when heavy AI capital spending would translate into cash flow. On 30 October, the S&P 500 fell 1.8%, the Nasdaq fell 2.9%, and the S&P information technology sector fell 4.2%.
The stock market decline generated demand for safe havens, and intermediate-maturity Treasuries performed better: the 5-year yield fell 2.3 basis points, and the 10-year yield fell 0.8 basis points to 4.93%; the 30-year yield rose 0.9 basis points, giving back earlier gains.
Safe-haven demand did not support all assets across the board during the same period: gold and silver fell 3.7% and 5.9%, respectively.

Concerns that the US might strike Iran again, along with an oil tanker incident in the Strait of Hormuz reported by Iranian state media, lifted the supply risk premium. Brent crude rose 2.4% on the day, WTI rose 2.1%, and the S&P energy sector rose 1.9%.
The US employment cost index rose 0.8% quarter on quarter in the third quarter, below the 0.9% recorded in each of the previous two quarters; wage growth slowed, but benefit cost growth accelerated. Morgan Stanley believes that, at the current pace of productivity growth, compensation increases are unlikely to create inflationary pressure.
Although labor cost pressures eased somewhat, Federal Reserve officials still favored further tightening. Dallas Fed President Logan advocated at least two more rate hikes of 25 basis points each; St. Louis Fed President Musalem also believed rates should be raised further as soon as possible.

Germany’s 5-year government bond yield fell about 4 basis points on the day, but the spread between French and German 10-year government bonds widened 9 basis points. Italian and Spanish government bond spreads also widened.
France’s preliminary third-quarter GDP fell 0.1% quarter on quarter, below market expectations for growth of 0.1%; over the same period, the eurozone as a whole grew 0.4%, above market expectations of 0.2%, highlighting pronounced differences in economic performance among member states.
Energy prices drove a rebound in headline inflation in several countries, and markets continued to price in roughly an 82% probability of a European Central Bank rate hike in December. However, German inflation slowed in October as a temporary fuel tax cut was reinstated, while Italian inflation was markedly above expectations.

The Bank of Japan voted 8 to 1 to hold its policy rate at around 1.25% and judged underlying inflation to be broadly consistent with its 2% target. Morgan Stanley said the decision and language matched its expectations before the meeting, and the governor’s press conference provided no clear clues about the timing of a near-term rate hike.
At 3 p.m. Tokyo time, Japan’s 10-year government bond yield fell 6.5 basis points to 2.77%; USD/JPY moved lower amid global risk aversion. Morgan Stanley believes the exchange rate’s movements still indicate fundamental upward pressure on USD/JPY.

The People’s Bank of China announced that, starting 2 November, it would conduct overnight reverse repos every business day through fixed-rate, quantity-based auctions, with the current operation rate at 1.25%. The 7-day reverse repo will switch to fixed-quantity, interest-rate auctions, conducted mainly during tax payment periods and at month-end.
Some instruments previously priced against the 7-day reverse repo rate will instead be anchored to the overnight reverse repo rate, with spreads unchanged. After the announcement, onshore renminbi interest rate swap yields for maturities from 1 to 5 years rose as much as 2 basis points intraday before returning to roughly unchanged by the close of the Asian session.