Market Preview: Nasdaq Slide and the Fed’s Choice

U.S. equity markets opened the week on uneven footing as a sharp rotation out of technology names pushed the Nasdaq down 1.5 percent while the Dow reached a record intraday high. The S&P 500 finished lower by 0.6 percent. Futures showed little sign of an early rebound the next session. Traders asked familiar questions about whether this is a pure repositioning episode or the start of something more persistent. The answers will depend on incoming corporate earnings, central bank commentary this week, and a stream of macro data that includes the Federal Reserve meeting minutes and a large Treasury bond auction.

Immediate Market Context

The tech retreat followed comments and research that highlighted two linked concerns. Remarks from the chief executive of a leading AI company reminded investors that the sector is prone to bubbles. At the same time, analysts have produced studies suggesting that returns from the current wave of AI infrastructure spending may be modest relative to the scale of capital outlays and that the technology could have disruptive effects on employment in certain sectors. Those themes were enough to trigger a rebalancing of portfolios ahead of next week’s earnings from Nvidia. Fingers were also trained at political and policy developments, including debate over a proposed U.S. government stake in a large domestic chip maker and the Federal Reserve’s annual gathering at Jackson Hole.

Policy Signals and Market Pricing

Despite talk of Fed concerns across markets, pricing in Fed futures barely budged on Tuesday and still reflects just over an 80 percent chance of a rate cut next month. The calendar brings two items that could test that view. The Fed’s meeting minutes will be released at 2:00 PM Eastern and two policymakers will speak, offering fresh clues on how officials weigh current inflation readings and labor market dynamics. The Treasury is scheduled to sell $16 billion of 20 year bonds, and that auction will be watched for demand and yield implications. On the day equities slipped, Treasury yields were broadly flat and the dollar firmed a touch.

The Core Dilemma: Support Housing or Rein In AI-Driven Capex?

What feels unique about this phase of the cycle is a policy trade off that is not captured by the usual jobs versus inflation checklist. The central bank still sits above its 2 percent inflation target by most measures. Market based and household inflation expectations do not signal strong confidence that inflation will return to target any time soon. The labor market shows modest layoffs and still low unemployment, a situation that partly reflects reduced immigration and tight capacity in some industries.

Against that backdrop the question becomes whether to ease now to shore up a struggling housing sector or to keep policy tighter to curb the rapid expansion of technology infrastructure spending. Easing would likely boost spending on AI related capital expenditures and make meeting the inflation target more difficult. Conversely, holding rates higher could deepen weakness in housing, a sector representing well over 10 percent of GDP. That trade off will frame Fed commentary this week and market reactions thereafter.

Housing Data That Matter

Housing sector indicators continue to point to soft demand and rising supply of unsold units. A gauge of homebuilder sentiment fell to its lowest level in more than two and a half years. More than a third of residential builders reported cutting prices, and two thirds said they were offering incentives to attract buyers. New housing inventory is approaching levels last seen in late 2007. Some headline metrics contained a mixed signal. Housing starts rose unexpectedly in July, but building permits, which are a guide to future construction activity, fell 2.8 percent to a five year low.

Mortgage market dynamics are reinforcing homeowner stasis. The average rate on a 30 year fixed mortgage has ticked down to a four month low of 6.67 percent for the week ending August 8 according to the Mortgage Bankers Association, but that remains more than 2.5 percentage points above the average rate on outstanding mortgages. Homeowners with low, older rates are reluctant to sell because financing a new purchase would be substantially more expensive. That has pushed the median price for existing home sales above the median price for new homes for the first time on record, a distortion that complicates the recovery in housing turnover and sales volumes.

Global Spillovers and Risk Appetite

Equity weakness in the United States spread to other markets. Japan’s Nikkei fell 1.5 percent and South Korea’s Kospi dropped 0.7 percent after Wall Street’s wobble. European markets were largely flat following earlier gains tied to hopes for a deal in Ukraine, as euro area inflation matched forecasts and a hotter than expected UK inflation print was partly explained by seasonal airfare swings. Chinese shares bucked the trend as the Shanghai index rallied to ten year highs, reflecting rotation into domestic cyclicals and hopes for additional stimulus measures.

Investor sentiment will be tested by a heavy corporate calendar. Major U.S. retailers and industrial firms report earnings this week, and market participants will be watching for any signs that consumer demand or margins are shifting. Analog Devices and other technology related earnings will be scrutinized for signals about chip demand ahead of Nvidia’s report next week.

What Traders Should Watch Today

Focus will be on the Fed meeting minutes and speeches from a couple of regional Fed officials for clues on how officials balance the housing situation with the surge in AI investment. The $16 billion 20 year Treasury sale will also be important for the longer end of the curve. Market participants should watch mortgage and housing leads and the corporate results calendar for any evidence that the cooling housing market is spilling into related sectors. Finally, public opinion on AI is a reminder that political and social concerns are part of market sentiment. A recent Reuters Ipsos poll showed 71 percent of respondents fear AI could put too many people out of work permanently, a statistic that could amplify market reactions to technology news and policy developments.

Expect volatility around policy related headlines and earnings updates. Positioning that contributed to the Nasdaq decline may find a counter move if data and corporate results reassure investors. Alternatively a weak set of reports or a stronger signal that the AI investment binge will accelerate could prolong the rotation out of growth names and increase pressure on policymakers to weigh the consequences for housing and inflation.

This session will test whether recent positioning is a temporary correction or a precursor to a broader re-rating of technology and cyclical assets.