Hot Inflation Crackles Over an AI Fire as the Fed Stares and Waits.
Monday’s opener asked whether Wednesday’s inflation report would beat or miss expectations, and how markets would react. It beat, and producer prices beat by even more on Thursday. The biggest reaction was in the AI trade, which sold off hard and left the Nasdaq with its worst week since June, while the Fed’s chair gave no new signal and the next rate hike is still expected in December.
Inflation ran hot twice, and AI stocks led the selloff.
Wednesday’s inflation report was hotter than expected where it counts. Core inflation, which leaves out food and energy, rose more than forecast, while the headline number matched expectations. In the first hours, hike bets jumped, long-term rates and the dollar rose, and stocks fell, with AI names, which are sensitive to borrowing costs, hit hardest. The rates and dollar moves did not last. As stocks kept falling, investors bought bonds, long-term rates gave back the jump and closed lower than the day before, the dollar topped out by late morning and slid from there, and hike odds came off their highs, ending the week at 17.2%.
Thursday’s producer prices came in far above forecasts, but the bond rally kept going. The 10-year yield fell to a three-week low, the dollar kept sliding, and stocks steadied, with the Dow up while the Nasdaq barely moved. Friday, the AI selloff and the slide in stock indexes continued. The Nasdaq finished the week down 4.48%, its worst week since June. The S&P 500 lost almost 1.95%.
Bitcoin and Ethereum fell with tech. Oil rallied on Friday, with U.S. crude climbing toward $100 a barrel and up about 8% on the week. Section 03 has the reasons and Section 06 the price detail.
What the week’s readings came in at, and what they signaled.
Hot inflation cracked the AI trade, and rates, the dollar and hike bets chased it lower.
Hot inflation raised the odds of more Fed hikes, and higher rates hit the AI trade hardest, because parts of the AI buildout run on borrowed money. On Wednesday the Nasdaq fell nearly 2%, led by the heavy borrowers. CoreWeave, which rents out AI computing power and borrowed heavily to build data centers, saw its bonds sell off to yields above 15%. The chip index finished the week down 11.4%, its worst since April 2025. Money rotated into value stocks, which is why the Dow held up. Bank of America analysts still call the trade resilient but name higher rates and heavy debt as the risks.
Then everything else followed stocks down. Long-term rates, the dollar and hike bets all reversed, and October hike odds ended the week at 17.2%. The market’s message was that the Fed will not hike into a cracking AI trade.
The Fed was already on wait-and-see, with officials including Vice Chair Bowman saying it can wait. Warsh then spent most of Thursday night on AI and gave no sign he is pushing for an October hike.
Friday the selling continued, while crude rallied on the Saudi and Houthi fighting, Iran’s attacks near Hormuz and the House bill to block the Russian diesel deal. Higher oil is another inflation headache, which keeps December in play.
Our read is that the Fed is unlikely to hike into a cracking AI market, and that higher inflation is also slowing the economy, which stocks are starting to price. Core retail sales were soft and wages are not keeping up with prices. If the AI trade that has held the market up keeps giving way, the case for continued hikes gets harder. The market still expects one hike in December, so that is the question now.
Monday’s above-expectations path played out on Wednesday, then the AI trade took over.
Monday’s opener asked whether long-term rates and other markets still follow the Fed. This week they did: hike odds, long-term rates and the dollar all jumped on Wednesday’s report, and all of it had been given back by Friday, with rates and hike odds reversing that same afternoon. The opener laid out three paths, and the one that played out was core inflation above expectations. What it did not predict was how fast the move would fade: the bond rally and Fed officials saying they can wait took the October hike back down. The path where core came in below expectations did not happen.
The path where oil headlines take over showed up in oil, but not in Fed pricing. Crude climbed toward $100 as Iranian strikes on tankers cut daily flows through the Strait of Hormuz to 11.62 million barrels from 17.15 million in the week to October 13, yet the odds of an October hike still fell. Friday also brought a House bill to block the administration’s plan, announced October 9, to import Russian diesel, which the administration said would lower fuel prices.
The question heading into the Fed’s October 27 to 28 meeting is whether the December hike stays the plan or moves up.
Three Academy lessons, run against this week’s real numbers.
Earn is for putting dollars to work: buy the coin and sell the perpetual contract against it to collect funding. Borrow is for people who need cash without selling their Bitcoin, and the cost is the funding you pay while you keep your exposure. Earners got a bit less over the week, though the latest day paid 10.9%, well above the 7-day average. Deribit is now the cheapest place to borrow, at 5.7% on average over the week, against 3.5% at Crypto.com on Monday, and the latest day cost 5.3%. Over the past 30 days the cost averaged 5.1%.
A covered call is when you hold a coin and sell someone the right to buy it from you at a higher price, collecting a fee up front. If the price never gets there, you keep the fee and the coin. If it does, you sell at the higher price and your gain stops there. At about the same distance out of the money, yields slipped from Monday, 12.3% against 13.6% on Bitcoin and 23.8% against 25.3% on Ethereum, as both coins fell. The strikes sit lower than Monday’s because prices fell.
| Call | Strike | OTM | Fee per coin | Annualized yield |
|---|---|---|---|---|
| Bitcoin | $91,000 | 11.4% | $1,143.21 | 12.3% |
| Bitcoin, closer | $90,000 | 10.2% | $1,326.94 | 14.3% |
| Ethereum | $2,700 | 11.7% | $65.25 | 23.8% |
| Ethereum, wider | $2,750 | 13.8% | $55.58 | 20.3% |
| Annualized funding | 1-day | 7-day | 14-day | 30-day |
|---|---|---|---|---|
| WTI crude (long side) | -20.62% | -34.76% | -32.76% | -15.81% |
| Natural gas (short side) | 0.00% | +184.91% | +257.52% | +133.27% |
The WTI against Natural Gas spread, long oil and short natural gas, is a funding-carry trade rather than a directional bet. Oil and natural gas perpetuals roll from the November contract to the December contract between the fifth and tenth business day of the month. December crude is cheaper than November, so crude’s funding turns negative and pays the long side. December natural gas is more expensive, so natural gas funding turns positive and pays the short side. The roll looks finished, and it shows: natural gas funding fell to zero on the latest day and crude’s eased, so the carry has dropped sharply even though the ratio rose, with oil gaining ground on natural gas over the last 100 hours.
The pairs below track stocks. Intel against Tesla is the earner-versus-spender rotation, whether the market favors companies profiting from the AI buildout over those spending heavily on it. SanDisk is a flash memory maker and Dell a computer maker.
| Pair | Now | Monday | Gaining ground, 100 hours |
|---|---|---|---|
| Intel vs. Tesla | 0.2543 | 0.2680 | Tesla |
| SanDisk vs. Dell | 2.88 | 2.58 | SanDisk |
| Bitcoin vs. QQQ | 114.76 | 110.82 | Bitcoin |
Oil rallied, while tech, silver and Ethereum fell.
On Hyperliquid, Nasdaq 100 open interest jumped 39% as price fell, a sign of fresh shorts, and Bitcoin longs took the biggest liquidation hit at $128.10M.
| Asset | Backdrop | Open interest change | Volume | Longs liquidated | Shorts liquidated |
|---|---|---|---|---|---|
| Bitcoin | fresh shorts opening | +8.43%$3.4B open | $13.61B | $128.10M | $23.85M |
| Ethereum | longs giving up | -3.22%$2.6B open | $5.85B | $70.98M | $9.61M |
| WTI crude | fresh longs opening | +4.85%$148M open | $670M | $3.1K | $1.40M |
| Gold | flat | -6.44%$295M open | $213M | $2.16M | $272.9K |
| Silver | fresh shorts opening | +6.11%$162M open | $673M | $4.25M | $23.3K |
| Nasdaq 100the index QQQ tracks | fresh shorts opening | +38.54%$320M open | $1.43B | $1.88M | $7.6K |
| S&P 500the index SPY tracks | longs giving up | -7.40%$330M open | $1.37B | $6.62M | $62.7K |
Hyperliquid is a different exchange from the prices above, so its numbers will not match them exactly. Nasdaq 100 and S&P 500 are the indexes that QQQ and SPY track. Hyperliquid lists the indexes themselves and has no QQQ or SPY market.
Open interest is the number of contracts still open, measured in contracts so price moves do not distort it. Volume is the dollar value of all trades over the same window, estimated from Hyperliquid’s one-minute price data. A backdrop needs price and open interest to each move 0.5% or more: open interest up with price down is fresh shorts opening, both down is longs giving up, open interest down with price up is shorts covering, and smaller moves read flat. A liquidation is a position an exchange force-closes because the trader can no longer cover the losses. Longs liquidated are traders betting on a rise who were forced out as price fell, and shorts liquidated are the reverse.
Fund selling slowed, with Bitcoin funds losing less than last week and Ethereum funds breaking their streak for a day.
A Bitcoin ETF is a fund big investors use to get exposure to Bitcoin without holding it directly. When money flows into the fund, that usually means institutions are buying. When money flows out, that usually means they are selling. Tracking that separately from price shows whether a move came from real buying and selling pressure. Last week the funds lost about $681 million. This week, through Thursday, they lost about $146 million. Tuesday brought a $175.62 million inflow, and Wednesday, the day of the hot inflation report, brought a $261.46 million outflow.
Ethereum funds lost about $250 million through Thursday. Their streak of outflow days ended at ten when Tuesday brought a $24.84 million inflow, and the funds sold again Wednesday and Thursday. Friday’s figure posts after the close, so the next opener closes that loop.
Inflation and the AI selloff moved prices. With the Fed in blackout, plan for headlines until the meeting.
Hot inflation hit the AI-heavy parts of the market hardest, and Bitcoin slipped with them. An October hike now looks unlikely, but a December hike is still expected, so rate-sensitive assets stay sensitive to the next inflation numbers.
Both inflation reports moved prices within minutes, and Wednesday showed a hot number can reverse within hours when stocks fall and bonds rally. On Hyperliquid, the Nasdaq 100 shorts the opener flagged kept building, and longs were the ones forced out in Bitcoin, Ethereum, gold, silver and both stock indexes, while in oil shorts were forced out as price rose. Oil and natural gas funding cooled once the contract roll ended, so the carry that looked large last week is much smaller.
The market has settled on a December hike and a quiet Fed. Waiting for the next data, or for the meeting, before choosing a direction is a position too.
This content is produced by Harmonic for educational purposes. It is strategy education, not investment advice.