Risk off, Rate Reprieve and a new OpenAI Lawsuit 10/15/26

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Kelly Evans (1:00)

You're listening to The Exchange. Here's today's show.

Thank you very much, Scott. The AI trade is getting shellacked, but with a surprisingly positive twist, I'm Kelly Evans and welcome to The Exchange. Take a look at the sell-off in these AI infrastructure names. It continues today. Nebius, Lumentum, DownBig, Iron as well, obviously. CoreWeave, shifting, making a bit of a comeback. We're only down half a percent right now.

Was this morning the lows? Are we going to put this behind us or not? Have more chapters to come. We'll talk about that. Anthropics, HoHom, revenue numbers last night not helping. We'll have more details on that. And what happens if these mega IPOs don't happen? The surprise twist is that the AI implosion is lowering bond yields. The benchmark 10-year treasury fell almost 30 basis points yesterday. And even after hot PPI data this morning, we're still down a little bit, 508 What that tells us about inflation, the economy and rate hikes. Plus, eight states suing OpenAI for alleged child harm. We'll speak with one of the attorneys general leading that effort about what fines and punishment this company and others could face. But let's begin with these jaw-dropping moves in bond yields. The good news is that mortgage rates will drop considerably this week if we stay around here. Does it mean that AI was the real culprit in the rate run-up we've seen in recent months? Let's bring in EY Parthenon's chief economist Gregory Daco along with our very own Steve Leesman, senior economics correspondent. Welcome to you both.

Steve, just kick us off for a sec. Set the scene here for you might have thought, I mean, after PPI, producer price index data came in hot, bond yields back on the, that was last week's story. That was the story a couple weeks ago. It's not the story anymore.

Steve Leesman (2:46)

Well, there's two pieces to this. First piece is that this flight to safety doesn't always last. It's not necessarily the be all and end all, the end point of where they are. Sometimes you have this movement into bond yields and that ends up being short lived. The other piece of this is you did get a stagnant consumer today. So you can add on top of that the concern that, or the hope even, that with consumers perhaps coming off the boil and feeling affected by these higher energy prices, that perhaps that'll be something that ends up easing the inflation concern.

Kelly Evans (3:17)

Actually, that's super important what you just said. And Gregory, jump in here, because retail sales kind of got lost in the shuffle, at least from a news point of view. But you think for the market, that was the much bigger event?

Gregory Daco (3:30)

Well, I think there are two elements that come into play. And Steve was right to highlight one of them. Higher inflation leads to demand destruction. And what we've had over the last few months is essentially income erosion from these higher inflation readings. In fact, real wages, so wages adjusted for inflation have been contracting for the last six months. So that's putting a damper on consumer spending. It's not leading to a pullback per se, but it's leading to more selective consumer spending activity. The other thing that's very important to keep in mind is that higher interest rates are also a damper on private sector activity. And we have to be very cautious that in a high interest rate environment, there is going to be less activity. So that's also to some extent, pressuring down overall economic activity. And I think we have to be very careful with this notion that the AI space is not sensitive to higher interest rates. There is sensitivity via the financial conditions channel.

Kelly Evans (4:22)

Steve, here's the whipsaw we've had to go through since yesterday morning. Yesterday morning was CPI, hotter than expected, yields initially rose. Right. That's when some were making the connection between yields and the behavior of leveraged names like CoreWeave. Right. Fine. Now the argument is, okay, so treasury yields were up yesterday, which hurts CoreWeave, but they're down today.