WEFC | Dancing with Financing [PDF Download]

💡Gasoline prices drove more than half of the monthly increase in the headline Consumer Price Index (CPI), which rebounded to 3.72% year over year and 0.65% month over month, marking its largest monthly rise in five months. This significant contribution from gasoline was a primary factor in the accelerated US inflation observed recently.

💡The shift in FedWatch probabilities for a December interest rate hike was primarily caused by the acceleration of US inflation, particularly the gasoline-driven headline CPI rebound. Following the CPI release, October hike odds decreased from above 50% to 28.2% by October 15, while expectations for a December hike increased as the market priced in persistent inflationary pressures.

💡AI capital spending is impacting the Federal Reserve's interest rate strategy by potentially keeping rates higher for longer. The report suggests that if stronger AI capital spending leads to sustained economic activity and inflationary pressures, the Fed may need to maintain a more hawkish stance than currently projected, thereby influencing the timing and magnitude of future rate adjustments.

💡TSMC and ASML's recent reports indicate robust AI chip demand as both companies reported demand exceeding supply. TSMC raised its 2026 US-dollar revenue growth outlook to approximately 44% after Q3 revenue beat expectations, and ASML's Q3 sales rose 55%, with management noting that supply in 2027–28 will not meet demand, extending to some customers inquiring about 2029–30 orders.

💡Increased capacity spending will affect semiconductor equipment pricing and margins as ASML is studying more 2028 capacity and expects negotiated price increases to lift revenue and gross margin from 2027, with a full effect in 2028. TSMC also kept 2026 capital expenditure at $60–64 billion and anticipates spending through 2028 to exceed the prior three years, suggesting upward pressure on equipment pricing.

💡The N2 ramp is expected to impact TSMC's gross margins in Q4 by causing an estimated 3–4 points of gross-margin dilution. Despite this, the Q4 gross-margin guidance remains between 65–67%, indicating that the company anticipates managing the initial costs associated with ramping up the advanced N2 node technology while still maintaining strong overall profitability.

💡Current market indicators of CoreWeave's financial distress include its shares falling more than 15% on October 14, unsecured bond yields briefly exceeding 15%, and five-year CDS spreads topping 1,100 basis points. These movements suggest significant investor concern regarding the company's financial health and ability to meet its obligations.

💡CoreWeave's free cash flow gap is being funded by debt markets, with the company covering a $10.5 billion free-cash-flow deficit in H1 by $11.53 billion of net new borrowing. This gap arose from H1 operating cash flow of approximately $3.66 billion against $14.12 billion of capital expenditures, indicating a heavy reliance on external financing to support its operations and growth.

💡CoreWeave's credit stress is not seen as a broader market issue because credit stress remains concentrated, with investment-grade spreads staying near 0.8% and CCC spreads exceeding 12%. CoreWeave's unsecured spreads widened 189 basis points to 362, significantly more than the 27–76 basis points for Google-backed developer bonds, indicating localized pressure rather than widespread default concerns.

💡Lessons from past funding cycles relevant for current AI financing risks include the rapid closing of refinancing windows experienced by telecom and shale borrowers. This historical context highlights the importance of late-October guidance and close monitoring of large-platform capital expenditures and financing commentary, as AI-related investment-grade deals above $3 billion have already fallen to zero from September to mid-October.