Markets Shake Off Credit Concerns to End Higher

US stocks had a solid week, recovering somewhat from the selloff that took place two Fridays ago from Trump’s tariff threat on China. The S&P 500 gained 1.70% for the week to move back within 2% of all-time highs. However, volatility (measured by the VIX index) increased to its highest level since May over another wave of trade tensions with China, worries about credit stress, the government shutdown, and a lack of economic data due to delays as the government remains shutdown, all of which have created another round of volatility.

Treasury yields were lower across the curve for the third straight week with the 10-year Treasury yield (the one most sensitive to economic conditions) down to 4.00% for its lowest level of the year. Much of the drop came the second half of the week as investors demand for safe-haven assets picked up from the regional bank worries.

The week started with a strong bounce and was driven by weekend comments from Trump that “all will be fine” when it comes to tariffs and trade talks with China. Then on Friday, stocks got another boost after Trump said his proposal for 100% tariffs on China was not sustainable. Trump and Chinese President Xi are still planning to meet at the APEC Conference in South Korea at the end of the month. There was also optimism when reports said some US representatives like Treasury Secretary Bessent will be traveling to China to meet with Chinese counterparts this week.

Trump said the focus will be on China’s exports of rare earth minerals, fentanyl, and its imports of US soybeans. The return of trade drama came after reports said China was increasing its export controls on rare earth minerals, an important component of many things such as smartphones, vehicles, and military equipment.

Between the trade headlines was a short selloff Thursday that was triggered by concerns in the banking sector about credit risks. It started after JPMorgan CEO Jamie Dimon said losses tied to bankruptcies in the auto sector could be the first signs of credit problems for banks, saying “when you see one cockroach, there are probably more.” The comments came after bankruptcies from two auto companies, First Brands and Tricolor Holdings, which left some banks with substantial write offs.

The worries intensified after regional bank Zions Bancorp reported a $50 million charge related to the two problems at two borrowers and, along with Western Alliance Bancorp, it was the victim of fraud on loans tied to funds that invest in distressed commercial mortgages. The news revived fears of deeper issues in the financial system.

That worry was alleviated somewhat and banks bounced back Friday after other regional bank leaders reported solid quarterly financial results and eased worries of similar credit events.

Outside of the credit concerns, financial results and overall conditions remain strong. The big banks, like JPMorgan, Citigroup, Wells Fargo, Bank of America, all beat expectations and noted strong investment banking and capital markets performance as well as forecasts for higher net interest income.

Since the beginning of the month there has been a major lack of economic data due to the government shutdown, which as of Monday entered its 20^th day. The agencies that collect data, like the Bureau of Labor Statistics, have been closed due to the shutdown, delaying many releases that the markets and Federal Reserve rely on to make decisions.

Last week the consumer price index for September was scheduled to be released. The good news is that instead of delaying it indefinitely, many workers were called back and the BLS will release the month’s inflation data this upcoming Friday. The September inflation report is important as it is used in many government cost-of-living adjustments for the following year for things like social security benefits, military pensions, federal income tax brackets, and other aid programs. The index is expected to have increased 3.1% over the past year, accelerating from 2.9% in August. 

Regarding the government shutdown, there are no signs of any negotiating out of Washington and concerns will grow the longer it lasts. Government employees have been missing paychecks and the longer this extends the bigger impact it will have on consumers and the economy.

Looking ahead, earnings reports may be the next big catalyst as the number of companies reporting ramp up the next three weeks with about 15% of the S&P 500 reporting results this week. The consumer price index is the main highlight on the economic calendar while it will be quiet on the Fed side of things with policymakers in a quiet period ahead of next week’s FOMC meeting where they are likely to cut rates a quarter of a point. 

Week in Review:

It was another positive week for the US equity market despite an increase in uncertainty due to trade tensions and concerns around credit stress, with the S&P 500 back within 2% of all-time highs. The major US indices finished as follows: Russell 2000 +2.40%, Nasdaq +2.14%, S&P 500 +1.70%, and Dow +1.56%. Volatility spiked the end of the week, with the VIX (volatility index) up over 30% at one point, but ended up falling Friday afternoon with the index down 4% for the week. The treasury curve steepened slightly with yields mostly lower on the short end which came after credit concerns surfaced. The 2-year Treasury yield fell 4 basis points to 3.47% while the 10-year yield fell 3 basis points to 4.01%. The dollar index fell 0.56%, gold rose 5.38% to another record high, and Bitcoin fell 5.96%. Oil was lower again, down 2.30% for the week, to the lowest level since 2021 amid OPEC supply increase, easing of tensions in the Middle East (Gaza), and forecasts for oversupply in 2026.

Recent Economic Data



• Retail Sales: Delayed
• Consumer Price Index: Delayed to October 24^th
• Producer Price Index: Delayed

• Empire State Manufacturing Index: The Empire State manufacturing index was 10.7 for October, moving into positive territory from the -8.7 in September and better than expected, indicating manufacturing conditions in the New York region improved in the last month. New orders and shipments increased while delivery times lengthened and supply availability worsened. Employment increased and the pace of input and selling price increases picked up pace.

• Philly Fed Manufacturing Index: The Philly Fed manufacturing index was -12.8 for October, the lowest since April, suggesting manufacturing conditions in the Philly region declined in the month. The report was basically the opposite of the Empire State report. The index fell from a solid 23.2 from September. About 25% of respondents reported decreases in activity, 12% reported increases, and 58% reported no change in activity.

• Industrial Production: Delayed

• Housing Market Index: Homebuilder sentiment improved in October from some of the worst levels of this cycle over the past several months. The housing market index, which measures homebuilder sentiment, improved to 37 this month, up from 32 in September which was the lowest of the year. The index on present sales was 38, up from the lowest level of the year of 34 last month. Expected sales over the next six months saw a big jump with the index improving 9 points to 54 for the highest since January. The index on traffic of prospective buyers rose 4 points to 25 but remains at very low levels.

• Housing Starts & Permits: Delayed
• Jobless Claims: Delayed

Company News



• Broadcom: Broadcom and OpenAI announced a strategic collaboration to deploy 10 gigawatts of AI accelerators (a system of advanced chips). OpenAI will design the accelerators and systems and will be developed and deployed by Broadcom. The report says with OpenAI developing its own systems, it can embed what it has learned from developing its models and products directly into its hardware which will help it achieve new capabilities and intelligence. A separate report later from The Information said OpenAI is working with Arm Holdings to develop the central processing unit as part of the deal with Broadcom.

• Bloom Energy: Bloom Energy, developer of fuel cell based energy, announced a $5 billion partnership with Brookfield Asset Management to become the preferred onsite power provider for its AI facilities using its advanced fuel cell technology.

• General Motors: General Motors said it will reassess its EV capacity and manufacturing footprint following recent government policy changes (elimination of the $7,500 EV tax credit along with various other incentives) which it expects will slow the adoption rate of EVs. Due to this reassessment, GM says it will see a one-time charge of $1.6 billion.

• Salesforce: Shares of Salesforce moved higher last week after the company said at its investor day event that it is targeting revenue of $60 billion by fiscal year 2030 (compared to about $41 billion expected this year) which would be a compounded annual growth rate of 10% until then.

• Boeing: Boeing said it delivered 160 aircraft during the third quarter, the most deliveries since 2018, an indicator the plane maker continues its recovery after several accidents. It is also aiming to get approval from the FAA to increase the production of its single-aisle 737 plane. 

• Other AI Related Deals: Several reports dropped last week regarding deals and partnerships being made around artificial intelligence. xAI and Nvidia were discussing a $20 billion lease-to-own deal for Nvidia’s chips, Broadcom will work with OpenAI to develop new AI chips, Walmart is partnering with OpenAI to allow customers to purchase directly through ChatGPT’s new “instant checkout,” and Oracle in a deal with AMD to supply 50,000 of its chips. 

Other News



• Bank Earnings Reports: Many banks reported third quarter earnings results last week and it was mostly a positive takeaway. The big takeaways were the higher net interest income, strong revenue from trading activity, strong investment banking revenues as dealmaking remained solid, better than expected fee income. Some banks noted the solid loan growth but some also reported higher loan loss provisions (the cash banks set aside for potentially bad loans). 

• Regional Bank Selloff: Regional banking stocks had one of their worst days of the year, with the regional bank index down 7% Thursday, after their exposure to credit risks began to surface. It started after several banks revealed their exposure to First Brands, a Cleveland based auto-parts maker that declared bankruptcy recently, and another bankruptcy filing by Tricolor Holdings, a subprime auto lender. Jefferies Financial said it had $161 million of exposure to First Brands. Meanwhile, Zions Bancorp said it found “apparent misrepresentations and contractual defaults” by borrowers and supporting collateral when it was reviewing loans. JPMorgan CEO Jamie Dimon made headlines when he commented on the situation, saying “when you see one cockroach, there’s probably more.”

• US/China Trade: Trump said last Sunday that “it will all be fine” in regard to the trade relationship with China, adding that both sides want to avoid economic pain and the US wants to help China, not hurt it. This comes after China said it will not back down and it is ready to take “corresponding measures” which was its first response since Trump threatened 100% tariffs Friday. The US Trade Representative later said the 100% increase will depend on China’s next moves, saying there is a chance both sides will be able to work through a deal before it goes into effect. Separately, Bessent said China is in a recession and they are trying to export their way out of it and trying to “pull everyone else down with them.”

• Trade: Trump said China is purposefully not buying soybeans from the US which is an “economically hostile act” and as a result the US is considering terminating business with China in regards to cooking oil and other elements of trade (the US was China’s top destinations for used cooking oil while China is the top buyer of soybeans).

• Trump and Putin: Trump held a phone call with Putin last week and said they have planned to meet in Budapest to discuss the war in Ukraine, although no date is set. He said Secretary of State Rubio and other high level advisors will meet next week with Russian counterparts to lay groundwork for his meeting with Putin.

• China Rare Earth Mineral Exports: Treasury Secretary Bessent said the US is discussing with its allies how it can push back against China’s move to implement export controls on rare earth minerals. A separate report from Reuters said Chinese rare earth companies have faced more scrutiny on export license applications and have been faced with long delays since September, with Chinese regulators returning applications more often and requesting extra information. China’s decision to impose export controls has created global pushback with world leaders meeting to form a response. China responded by saying the US is deliberately trying to create panic. 

• Chairman Powell Comments: Fed Chairman Jerome Powell made several remarks on monetary policy to the National Association of Business Economics last week with most comments in regard to the Fed’s balance sheet. He hinted the Fed could end balance sheet runoff (or quantitative tightening which reduces the amount of bank deposits, or reserves, in the financial system) in the coming months (the balance sheet peaked at $8.5 billion and they have reduced it to about $6.3 billion so far). The Fed has said it will end this when it sees signs the markets are less flush with reserves. He admitted that stopping quantitative easing (buying bonds or increasing its balance sheet to support the economy) in 2022 could have and should have ended sooner. On policy as a whole, Powell said the Fed is trying to balance against two risks (inflation and unemployment) that call for competing policy moves which removes the chance for a risk-free path for policy. 

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