Fed day after the midterm sell-off

2026-11-04 · United States · Fed day after the midterms, Asian chips and the memory chain, Norges Bank's hold tomorrow

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The Fed decides after a midterm night that hit Asian chips. We test the gridlock rally case, Howell's bond call and the memory chain, and set out Norges Bank's case for a hold.

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The Fed decides the morning after the midterms

Democrats have won the Senate and, on several reports, the House as well, though not every outlet has called it. Asia gave the first market verdict: Japanese and South Korean stocks fell more than 4%, with the selling running through tech.

Two pre-election arguments, tested

On Monday, Bravos Research argued that a Democratic sweep would spark a rally by cutting policy uncertainty. One night settles nothing, but the first reaction fits our disagreement: gridlock neither lowers the discount rate nor makes earnings safer, so it does not expand the multiple. If the relief were real, credit would show it first. Instead the US high-yield spread widened to 3.43 percentage points on Monday from 3.30.

Read: level the spread at 3.43; trigger further widening in the weeks of gridlock; what would change this is the spread narrowing back through 3.30 while the Fed is still hiking.

Finance Bureau argued that the midterms' market effects play out over time, and that Fed decisions and a shutdown risk matter more. We agree the Fed matters more. But a 4% fall in Tokyo and Seoul on the first night is not a slow burn.

The Fed tonight

If the committee weighs the labour data over one night in Asia, we still expect a quarter-point rise. US unemployment was 4.2% in the latest report and the Sahm indicator sat at zero.

Read: level unemployment at 4.2%; trigger a quarter-point rise with another left open; what would make it wrong is a hold.

Bonds, and Howell's case

Treasury yields fell overnight as investors crowded into bonds for safety, against our view that long yields stay high. One night of haven buying does not drop that view. On Monetary Matters with Jack Farley, Michael Howell argued that the global liquidity cycle has turned down and that long-duration government bonds are the defence. Overnight went his way. We disagree on the driver: a Fed still hiking into a tight labour market is not the backdrop for a lasting bond rally. If Friday's jobs report shows unemployment above 4.2% and Treasuries keep rallying, his case has beaten ours.

The equity read

Howell also warns that lower-tier credit spreads widen first. Credit has started to move, but at 3.43 percentage points it is widening, not breaking. Until it breaks, a falling index is a grind.

Read: level the high-yield spread at 3.43; trigger further widening with Asian chip stocks down 10% in a week; what would change this is the spread blowing out with no big hyperscaler cutting its spending plans.

Asian chips and the memory chain

The Asian selling ran straight through the chain we have argued from since October:

  1. Hyperscaler AI spending accelerated hard this year.
  2. That lifted memory and chip-equipment margins to generational highs.
  3. Index earnings concentrated in a handful of names.
  4. When faith in that concentration breaks, memory resets first.
  5. The broad US de-rating only completes when credit confirms.

A tech-led fall of more than 4% in Tokyo and Seoul moves the warning sign without firing it: the threshold is a 10% weekly fall in Samsung and SK Hynix, and the high-yield spread has widened only to 3.43.

The CEPA Podcast, with Ryan Fedasiuk, argued that roughly 90% of advanced logic chips are made in Taiwan and that high-end memory is concentrated in Samsung, SK Hynix and Micron. We agree on supply, and it explains why a US vote lands on Seoul. But concentration means the memory reset, when it comes, is concentrated too.

Two things push the other way. Mitsui Chemicals agreed to buy chip-materials maker JSR for more than $8.2 billion. And Finance Bureau argued that Apple faces margin pressure from memory chip costs. We agree with the mechanism, but it is evidence of strong memory demand, not of a reset.

From a Nordic point of view, the exposure is the network and equipment names that trade with the semiconductor tape. They take the sentiment hit without earning the memory margins.

Read: level a 10% weekly fall in Samsung and SK Hynix; trigger that fall arriving with the high-yield spread breaking out wider; what would change this is Seoul and Tokyo recovering this week's 4% before Friday's US jobs report.

Norges Bank's hold tomorrow

Norges Bank is at 4.5% after the September hike. Core inflation fell to 3.1% in September from 3.5%, and unemployment rose to 5.0% from 4.6%: a loosening labour market and falling underlying inflation let a bank pause near the top of its cycle.

The case for another hike is the headline: inflation rose to 3.4% from 3.2%, and power across the twelve Nordic zones has averaged about €151/MWh so far this week, up from about €114 last week.

Read: level 4.5%; trigger a decision statement that leaves another rate rise on the table, consistent with our view that the rate stays at or above 4.5% through mid-2027; what would make it wrong is another hike tomorrow.

Friday

Our read remains US unemployment at 4.2% or lower in Friday's jobs report. Above that, with the Sahm indicator off zero, the Fed's hiking case starts to come apart.

Sources