Fed holds rates; Microsoft and Alphabet diverge after hours
(Cash-market closing figures are for Wednesday, 28 October, US Eastern time; after-hours quotes were verified against compliant sources as of early morning 29 October, Hong Kong time.)
On Wednesday, the S&P 500 rose 0.28% to 7743.97 points, the Dow rose 0.19% to 52475.10 points, the Nasdaq rose 0.27% to 26549.85 points, and the equal-weight S&P ETF (RSP) fell about 0.04% to $217.43 (Reuters, as republished) (RSP closing data). The 10-year US Treasury yield closed near 5.01%; Brent crude rose about 1.5% to around $115.7 per barrel, WTI rose about 3% to around $103.3 per barrel; spot gold edged up amid volatility to around $4067 per ounce; and the dollar index fell about 0.2% to around 102.14 (Reuters) (Reuters, as republished).
Market themes
Wednesday's market unfolded in two stages: before the close came the “expected hold”; after the close came the “unexpected divergence” — the Fed kept rates unchanged in a 10–2 vote, stock indexes rose only about 0.3%, and the real action began after hours: Microsoft rose about 6% and Alphabet fell about 10%. Warsh's press conference offered no indication of easing in December, nor did it close the door to a rate increase; oil above $115 and Canada's rate hike the same day both reminded markets that “the inflation story is not over.” Tonight's GDP and PCE data will offer the first answer to that question.
I. The Fed and global central banks: a hold was the consensus, a December hike remains on the table, and Canada moved first
- The Fed voted 10–2 to keep its benchmark rate unchanged at 3.75%–4.00%. Its statement upgraded its assessment of the economy to “strong,” while acknowledging that inflation “remains elevated” and saying that “the accumulation of additional information” would help the committee assess the appropriate policy stance. Cook and Hammack dissented in favor of a 25-basis-point hike (Reuters). At his press conference, Warsh said politics played no role in the decision, the US economy was not overheating, productivity improvements were real, and the committee did not want to “throw sand in the gears” of the economy (Reuters) (Reuters). Holding steady does not mean a pivot — two hawkish dissents and the words “additional information” leave the option of a December hike on the table unchanged.
- Jeff Schulze of the Franklin Templeton Institute told Reuters that the decision did not rule out another 25-basis-point hike before year-end. The key question was the pace of tightening, and the committee appeared content to reverse last year's cuts at a measured pace, which historically has been more favorable for risk assets (Reuters, as republished). The market-implied probability of a December hike remained around 85% (Reuters, as republished). Warsh also disclosed that one of the eight meetings in 2027 would be devoted to long-term monetary policy strategy, with no rate vote (Reuters). Warsh spoke of “patience,” but markets heard “it isn't over” — that is why the yield curve steepened after the decision.
- On the same day, another North American central bank moved first: the Bank of Canada raised rates by 25 basis points to 2.50%, its first hike in three years, saying further increases might be needed to prevent energy costs from pushing up broader inflation. Canada's 2-year government bond yield subsequently reached a two-year high (Reuters). The Reserve Bank of New Zealand unexpectedly held rates steady, and the New Zealand dollar fell more than 1% (Reuters, as republished). The Fed held, Canada hiked and New Zealand held — three central banks' answers on the same day all tell the same story: rising energy prices are reshaping who fears inflation most.
II. Bonds, the dollar and commodities: the steepening curve is the bond market's response to Warsh; oil rises, gold holds up and the dollar retreats
- Wednesday's bond-market response was written in the shape of the curve, not in the 10-year yield alone. Reuters' Trading Day column noted that the decision itself was expected, but the steepening yield curve showed that bond investors were not fully persuaded by Warsh's assurance that inflation would fall in due course (Reuters, as republished). After Warsh began speaking, the 2-year yield fell 1 basis point to 4.726%, the 10-year yield rose 1 basis point to 5.007%, and the 30-year yield rose 2 basis points to 5.325% (Reuters). The short end believes in “patience”; the long end does not believe “inflation is dead” — the steepening curve is the spread between those two views.
- Oil was the source of Wednesday's inflation narrative: after the Houthis claimed to have attacked Saudi Arabia's Ras Tanura refinery, Brent rose about 1.5% and WTI about 3%, while European natural gas also climbed to a near four-year high. Saudi Arabia did not immediately confirm the attack on the facility, which processes 550 thousand barrels a day (Reuters, as republished) (Reuters). Spot gold edged up amid volatility, while the dollar index fell about 0.2% (Reuters, as republished). Oil up, gold holding firm and the dollar down — together, these moves suggest the market saw oil prices as an “inflation risk,” rather than a “safe-haven signal.”
III. Stock and sector moves (including earnings): eight sectors rise and three fall, technology leads and real estate trails; Oracle gains 11% on its “cap”
- Of the S&P's 11 sectors, 8 rose and 3 fell. Technology led with a gain of about 0.5%, while real estate was last, down about 0.7%. The pan-European STOXX 600 closed up 0.07%, South Korean stocks surged about 7%, and Japanese and Chinese stocks each gained about 1% (Reuters, as republished) (Reuters, as republished). Closing gains were “broad but thin” — the real divergence came after hours, and the closing sector rankings were only a prelude.
- Oracle was the clearest example during regular trading of a “reward for discipline”: at its investor day, it set a fiscal 2030 revenue target of more than $225 billion and capped new capital-market financing for fiscal 2027 through 2030 at $20 billion, split equally between equity and debt. Its shares rose about 11% (Reuters, as republished). The market rewarded not the target itself, but the promise that “spending has a limit” — amid anxiety over AI financing, a table of caps is worth more than a table of growth.
- The other side of after-hours trading was equally extreme: Fortinet fell about 25% after hours (Reuters, as republished). On the same night, Oracle rose on its “cap,” Fortinet fell on guidance, Microsoft rose by delivering, and Alphabet fell on cash flow — there was no sector-wide logic after hours, only the logic of each company's own results.
IV. AI news: Microsoft and Alphabet deliver opposite report cards on the same night; the market rewards only “spending that makes money”
- Microsoft's fiscal 2027 first-quarter revenue was $92.3 billion, up 19% year on year, and adjusted earnings per share were $4.89, both above expectations. Microsoft Cloud revenue was $63.9 billion, up 30% year on year, Azure grew 48%, and operating profit was $45.9 billion (Microsoft official). Azure grew 48% and cloud revenue growth accelerated to 30% — the point of Microsoft's report is not that “AI demand is still there,” but that “the cloud business is already covering the bill.”
- Alphabet's third-quarter revenue was $127.6 billion, up 25% year on year but below expectations of about $128.2 billion. Earnings per share were $2.12, well below expectations of about $3.01; an $8.7 billion loss on equity securities reduced earnings per share by about $0.55. Google Cloud revenue doubled to $30.7 billion; search revenue of $63.4 billion and YouTube advertising revenue of $11.2 billion both missed expectations; capital expenditure was $51.4 billion and free cash flow was negative $9.1 billion (Reuters, as republished). Cloud revenue doubling could not save the stock, because the market was punishing not growth but the fact that “the advertising money machine did not keep up and cash flow turned negative again” — Microsoft rose about 6% after hours and Alphabet fell about 10%, pricing in that view.
- Reuters' Trading Day column also highlighted two background themes for the AI trade: SK Hynix announced a return of $75 billion to shareholders after record profits, and chip stocks consequently extended their gains; China's new export controls drew boundaries around core AI assets (Reuters, as republished). Higher memory prices translating into profits, cloud providers placing limits on one another and returns — the criteria for judging the AI trade are narrowing from “telling stories” to “cash flow and discipline.”
V. Forward calendar (Hong Kong time)
- 29 October (Thursday) 20:30: preliminary Q3 GDP (market expects annualized growth of about 3.0%–3.2%), September PCE (market expects about 3.6% year on year), initial jobless claims; 21:15 ECB rate decision (market expects the deposit rate to remain at 2.50%); before the open: Eli Lilly, Mastercard, Merck, Caterpillar; after the close: Amazon, Intel.
- 30 October (Friday): Bank of Japan decision (market expects it to hold at 1.25%); 20:30 Employment Cost Index (market expects 0.8% quarter on quarter); before the open: Exxon Mobil, Chevron.
- 3 November (Tuesday): US midterm elections; 5 November (Thursday): major French union strike; 16 November (Monday): Warsh attends the Federal Reserve's productivity and employment task force hearing in the San Francisco Bay Area.