That was the fourth scenario I was talking about yesterday – the Goldilocks one that I believed was the least likely. And there you go, sometimes the wind just blows in the right direction. Yesterday was that day.

Softer-than-expected PCE numbers – though inflation remains above the Federal Reserve’s (Fed) 2% target and still requires attention – helped cool Fed rate hike expectations.

The US 2-year yield, which best captures Fed rate expectations, fell – although the easing remained short-lived. Today, we can say that at least it didn’t push any higher. Again, yesterday’s softer-than-expected PCE reading doesn’t mean that the Fed won’t hike, but the urgency has eased somewhat.

On the other hand, stronger growth and jobs data supported the idea that US economic activity remains resilient to higher energy prices and rising borrowing costs. We all know that some sectors are doing so well that they’re masking the weakness in others. But yesterday, even those sectors struggled to catch a tailwind from the data. In fact, longer-maturity yields kept climbing despite the soft inflation data – investors were probably factoring in the strong growth numbers and big government spending.

As a result, the US 10-year yield went straight up to 5.30%. The latter pulled the S&P 500 lower, while its equal-weighted index was hit harder. The Nasdaq 100 managed a small gain of 0.23% despite rising yields. That fits the narrative that strong demand could help tech companies withstand higher yields.

On that, HPE boosted its networking revenue growth forecast yesterday and announced a $1.2bn order from a cloud company called Vultr. Google released the Gemini 4 and Micron also delivered a strong beat: its revenue reached $54.23bn versus around $50–51bn expected, while adjusted EPS came in at more than $33 versus $31–32 pencilled in. Next-quarter revenue guidance of $61.5bn also comfortably exceeded the $57bn consensus.

The initial share-price reaction was modest, however. The company indicated that its exceptional margins could soften slightly: adjusted gross margin was 87% in fiscal Q4, with guidance for 86.25% next quarter – a modest decline of 0.75 percentage points. So let’s not boo…

As such, investors could get some AI relief. Nasdaq futures are leading gains, while the KOSPI is up 1.20% and SoftBank rallies 3.50%, despite news that the FTC has opened an investigation into OpenAI and Anthropic over potential risks to consumers and whether the companies misled the public about the safety of their AI systems.

Bad news from Europe

Across the Atlantic, the news was a bit messier. Earlier this week, Spanish harmonised inflation hit the 5% mark for September. Yesterday, French, Italian and German figures reinforced that concern: inflation in Europe is mounting, increasing the chances of further ECB tightening.

The combination of less hawkish Fed expectations and more hawkish European Central Bank (ECB) expectations could have pulled EURUSD out of the medium-term bearish zone – but no. The EURUSD extends its weakness within the bearish consolidation zone. The US long-term yield story is the dominant driver, while the widening spread between German and French yields fails to restore appetite for the euro.

Moving forward, we will continue to watch the data. On Friday, the official US jobs data could suggest that the labour market remains healthy, keeping the Fed’s focus on fighting inflation. The risk with strong data is that, if upcoming inflation metrics continue to worry investors, the hawks could return rapidly to a market that has become difficult to cheer up.

From a cross-asset perspective

Rising longer-term yields now increase competition for capital. At current levels – and provided long-term inflation expectations remain anchored – some investors like the idea of moving into a safer play and buying US Treasuries.

At a starting yield of around 5.3%, the potential one-year returns look asymmetric: coupon income could cushion losses until the yield rises to roughly 6.1%. A 100bp rise would imply a total loss of around 1.5%, while a 100bp fall could generate a return of nearly 13%, including coupon income (Bloomberg).

But, if yields continue to rise, it means that buying demand is still insufficient to absorb the selling and new supply at current prices. Some big overseas buyers may also be holding back for various reasons. You know what central banks are buying: gold.

Gold is under pressure from rising yields right now, but longer-term buyers continue to accumulate it: central banks bought a net 289 tonnes of gold in Q2 this year – a record for a second quarter and a rise of more than 60% compared with a year ago, according to the World Gold Council.

The report also highlights that 45% of surveyed reserve managers expect to increase their own institutions’ gold holdings, while 89% expect global central bank gold holdings to increase over the next 12 months. Wild.

Gold’s short-term troubles will most probably not weaken its longer-term positive trend, as the world – as it stands today – needs a safe asset that is not attached to one single country, which could suddenly turn from your best friend into your biggest threat. The past year or so has shown the risks of that dependence. Now it’s time to adapt to that new reality.