Interest Rates Rise Despite 'Employment Downturn': 3 Anomalies Lurking in NVIDIA's Record Highs and the AI Market

• Employment statistics show a significant downturn: September non-farm payrolls fell sharply to +29,000, and the probability of an October rate hike plummeted to 16%.

• Interest rate reversal and index polarization: Interest rates reversed to rise after an initial decline. While the Nasdaq and NVIDIA hit record highs, the Dow and small-cap stocks ended the week in the red, showing a divergence in sentiment.

• Focus this week is on the FOMC minutes: With the minutes due for release on October 7, the market continues to be capped by concerns over ‘higher-for-longer interest rates’ and ‘funding for AI investments’.

1. Market Review of Last Week: The ‘Divergence in Sentiment’ Behind Record Highs
The U.S. market last week saw a notable divergence in performance among major indices.

S&P 500
7,722.72
+0.73%
-0.27%

Nasdaq Composite
27,190.86
+1.19% (Record High)
+0.45%

Dow Jones Industrial Average
51,176.96
+0.49%
-1.26%

U.S. 10-Year Treasury Yield
5.277%
+4.3bp
+11.0bp

Although the S&P 500 and Nasdaq opened with strong buying on Friday, they pared gains throughout the day. On a weekly basis, only the Nasdaq, driven by semiconductors and large-cap IT, managed to remain in positive territory, while the Dow and small-cap stocks (Russell 2000) sank into weekly losses.

2. [Deep Dive] Why did long-term interest rates rise despite weak employment data?
The September employment report released on October 2 showed non-farm payrolls at +29,000 (forecast 85,000–90,000), significantly missing market expectations.
Following the textbook reaction of ‘slowing employment = pause in rate hikes = lower interest rates = higher stock prices,’ the probability of an October rate hike dropped sharply from 64% to 16%, and the U.S. 10-year Treasury yield briefly fell to 5.157%.
However, interest rates then reversed sharply, ultimately closing at 5.277%. The reasons behind this ‘rising interest rates despite weak employment’ are as follows.

1. Rate hike retreat only for ‘October’: While the market had priced in a pause for October, a series of ‘inflation concern’ remarks from Fed officials kept the possibility of a December rate hike in focus.

2. Global government bond sell-off: Global upward pressure on interest rates, starting with UK gilts, has spread to the US Treasury market.

3. Long-term structural issues: Apart from short-term policy rate outlooks, long-term upward pressure on interest rates, such as the US fiscal deficit and debt expansion (projected at 160% of GDP), remains deeply rooted.

As a result, the chain reaction of ‘stock price gains due to lower interest rates’ ended shortly after the opening, and the structure where high long-term interest rates cap the upside of the stock market was reaffirmed. 3. Shadows of the AI market: New questions regarding the ‘deployment’ of investment capital. While the AI semiconductor sector continues to show strong momentum, with NVIDIA briefly hitting $237.87 and reaching a market capitalization of $5.72 trillion, caution regarding the ‘sustainability of AI investment and funding methods’ is beginning to surface in the market.

• Concerns over circular financing: The circular funding structure within the industry, such as Broadcom’s $42 billion financing and chip purchase deal for Anthropic, is being noted.

• Off-balance sheet treatment: Reports of Amazon handling $8 billion worth of NVIDIA chips off its balance sheet have raised concerns about the lack of transparency in CapEx (capital expenditure) burdens.

• Deterioration of free cash flow: Massive investments are putting pressure on Big Tech’s cash reserves, with Alphabet’s free cash flow turning negative for the first time.

Although AI demand itself is strong, the perspective of ‘whether returns on investment (ROI) commensurate with massive capital expenditures can be obtained as expected’ is becoming a major theme that will influence future market trends. 4. This week’s main events and 4 market scenarios. The most anticipated event this week is the FOMC minutes (from the September meeting) to be released on Wednesday, October 7, at 14:00 ET. The focus will be on the extent of the division among members regarding the September rate hike decision and their stance on a December rate hike. The four market patterns and key assessment points expected this week are as follows.

• Scenario A: Consolidation (Expected probability: 40%)

• Scenario B: Re-rise in long-term interest rates and stock price decline (Assumed probability: 25%)

  • The minutes become hawkish, and the closing yield of the 10-year Treasury note breaks through the recent high (5.34%). A risk scenario where selling intensifies, centered on high-tech stocks.

• Scenario C: Re-rise in crude oil prices (Assumed probability: 20%)

• Scenario D: Broadening of investment targets due to falling interest rates (Assumed probability: 15%)

5. Investor approach and checklist
Organize your current stance based on objective analysis rules.

• 🟢 Index (VOO, etc.) accumulation: Continue unconditionally without being swayed by market noise.

• 🟢 AI/Semiconductor sector: Maintain holdings, but avoid excessive additional purchases considering the uncertainty in investment funding and the fact that it is at record-high levels.

• 🟡 Energy (XLE, etc.): Maintain hedge positions as Middle East geopolitical risks remain.

• 🔴 Caution on individual earnings: Beware of the ‘Beat & Drop’ phenomenon after earnings announcements (this week, focus on earnings from companies like PepsiCo and Delta Air Lines).

Rather than relying on emotional forecasts, a stance of coolly confirming the numerical judgment points (such as the 10-year Treasury yield at 5.34% or 5.20%) is required.
*This article is for informational purposes only and does not recommend the buying or selling of any specific securities. Please make investment decisions at your own risk.