Written Commentary
MACRO FRAME
September’s CPI and PPI data continue to fuel expectations of a new hiking cycle from the Fed, while higher interest rates are adding to stress in credit markets.
STOCK INDEX FUTURES
Equity index futures are mixed ahead of the Fed’s decision and results from Microsoft and Alphabet. The advance extends Tuesday’s semiconductor-led recovery, although investors remain selective as earnings test the economics of AI investment. The Fed is expected to remain on hold. Memory stocks are benefiting from SK Hynix’s more than sevenfold increase in quarterly profit. Micron rose 3.6% in premarket trading, while Sandisk and Western Digital also advanced. Nvidia, AMD and Marvell were firmer, and Alphabet gained following a report that OpenAI plans to purchase Google’s AI chips. Vertiv’s stronger results and raised full-year forecasts provided additional evidence of robust infrastructure demand. Investors will continue to look for evidence that companies can generate sufficient returns to sustain spending. Microsoft and Alphabet’s cloud growth, cash generation and capital-expenditure guidance will therefore be in focus and matter more than headline revenue beats alone. Anthropic’s IPO filing has helped rebuild confidence this week, but has not resolved concern about debt-funded expansion.
CURRENCIES
US DOLLAR: The USD index is holding steady at 102.33 as the market awaits the Fed’s decision later today. An unchanged Fed rate is widely expected, leaving the statement, vote count and guidance on subsequent tightening as the principal catalysts. Dissents in favor of a hike would reinforce expectations of a December hike and likely firm the dollar further. AI sentiment, which like the Fed decision, will play a dominant role in price direction for the currency. Renewed weakness in AI-related assets could undermine confidence in US growth and encourage a less aggressive policy outlook. Strong earnings and persistent inflation, by contrast, would reinforce expectations that rates remain higher for longer.
EURO: The euro rose 0.12% to $1.1135. Today’s Fed decision and large tech earnings will certainly shape dollar direction, which is likely to impact the euro ahead of the ECB’s rate decision on Thursday. The bank is also expected to keep rates on hold, leaving focus on what signals it gives on future monetary policy. The ECB’s quarterly Bank Lending Survey showed that the effects of earlier tightening are becoming more visible, potentially reducing the need for additional increases further into next year if the trend persists. However, money market expectations are little changed: pricing a 68% chance of a hike in December and 70 bps of tightening over the next 12 months. While Moody’s decision to leave France’s rating unchanged has provided some relief, French fiscal difficulties and political uncertainty look set to persist ahead of next spring’s presidential election.
Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.
BRITISH POUND: Sterling is 0.10% lower at $1.3290. Finance minister Healy announced a smaller fiscal buffer for the government to meet its targets in his first budget speech. Healy expects debt-interest spending to be £14 billion higher this year. He also cited borrowing falling from 5.1% to 4.4% of GDP. Largely, the existing fiscal rules remain unchanged. Whether or not the gilt market takes that as a sign of relief, stress, or a continuation of the status quo will depend on future growth prospects.
Watch point: We expect the pound to regain some lost ground against the dollar amid increased expectations over a November rate hike, but still ultimately favor a stronger dollar over Q4 2026.
JAPANESE YEN: The yen is little changed at 157.95 yen per dollar. No new data out of Japan overnight will leave focus on today’s big tech earnings and Fed decision. Corporate services-prices rose 3.7% y/y in September, while Finance Minister Satsuki Katayama on Tuesday reiterated warnings that Japan was prepared to take decisive action in currency markets. The Bank of Japan is expected to hold rates steady on Friday, which should leave focus on its guidance on subsequent tightening. Strategists cited by Reuters found no evidence that Japanese institutions were bringing overseas funds home, yet. September core inflation above the BOJ’s 2% target supports the case for further normalization, while the majority of Reuters-polled economists expect a quarter-point increase in December.
Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be appears to be the primary scenario.
AUSTRALIAN DOLLAR: The Aussie is up 0.11% to $0.7033. Headline CPI rose 1.3% q/q, while quarterly trimmed-mean inflation accelerated to 1.0% q/q and 3.7% y/y. Fuel drove much of the headline acceleration. Automotive fuel jumped 9.4% m/m and 23.6% y/y as higher world oil prices fed through. Housing remained the largest contributor, but was easing. Housing inflation slowed to 5.2% y/y from 5.7%, contributing approximately 1.14 percentage points to headline inflation. The result has strengthened the case for RBA tightening in November. Money markets are now pricing an 85% chance of a hike and are fully priced for an increase before year-end.
Watch point: August’s hiring figures and Q3 inflation argue for a higher-for-longer stance.
TREASURY FUTURES
The curve continued to flatten ahead of today’s Fed decision. With the Fed expected to remain on hold, focus at the meeting will center around the vote composition and Warsh’s characterization of the US economy. Any votes to hike at the immediate meeting will reinforce expectations of a December hike and that the Fed is poised to remain on a tighter monetary policy path. Warsh has recently described the economy as strong and financial conditions as accommodative, so any change to his interpretation will likely move markets. If Warsh downgrades any growth comments, or states that policy seems somewhat restrictive, expectations of future tightening will likely be pulled back. On the other hand, if he affirms his assessment that US growth remains strong and financial conditions as loose, tightening expectations could firm.
Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.
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