The Week in Markets
A week after the Fed's hawkish 25bp hike, managers agree on the direction and disagree on the distance, and most think the market has run ahead of the Fed. The dot plot points to one more hike by year-end; futures price two. In the one-or-two-more camp: Nuveen (one more, then 2027 cut risk), Neuberger Berman (December, then a short cycle as core inflation falls), UBS (December, then hold) and BNY Investments (two more over 12 months, fewer than markets imply).
Leaning higher: Morgan Stanley's Seth Carpenter now sees hikes in December and March to a 4.25 to 4.50% terminal rate, while Capital Group's Darrell Spence expects three or four more, towards 5%, by the end of 2027. The common thread, put plainly by Amundi: resilient growth is what lets the Fed keep going. BNY and UBS both call the market's pricing of the path overextended.
A synchronised turn: the BoJ reaches 1.25%, the BoE bares its teeth
The Bank of Japan raised rates to 1.25%, the highest level in 31 years, and Aviva Investors notes that the Fed, ECB and BoJ all moved 25bp in September. Vanguard's Grant Feng calls Japan a "high-pressure economy" and expects two more hikes to 1.5% this year, with neutral nearer 2 to 2.5%, above what markets price. Morgan Stanley also sees the BoJ going further (1.5% in December, about 1.75% in March) but thinks markets are too aggressive on the destination, and its FX strategists still favour the dollar against the yen.
The Bank of England held at 3.75% on a 6 to 3 vote, with three members voting to hike. BNP Paribas Asset Management reads it as a hike in waiting: UK inflation was 3.1% in August and the Bank now guides to slightly above 4% early next year.
The bond selloff is a real-rate story, and a new argument about AI's debt
Managers are aligned: the rise in yields is about real rates, not fears about inflation. Neuberger Berman's Ashok Bhatia says markets are pricing "a new rate cycle", not a fiscal crisis. The disagreement is over why. PIMCO's Lotfi Karoui says the "AI issuance is crowding out Treasuries" story gets the mechanism wrong: an event study of surprise AI debt deals finds no significant footprint in 10-year yields or term premia, and capex lifts real rates through the savings-investment channel instead.
Lombard Odier's Florian Ielpo pushes back, finding that yields rise only when both borrowers show up at once, 2.7bp per point of surprise, which he calls "reverse" crowding out. UBP notes the five hyperscalers will spend about $820bn this year against about $750bn of operating cash flow, with a significant part of the revenue owed by OpenAI and Anthropic. UBS's HOLT framework offers the equity read-across: higher yields mean harder choices, and greater selectivity.
Oil, Iran and the UN: diplomacy cools crude, energy still sets the tempo
Brent fell below $100 a barrel for the first time in two weeks after President Trump described talks with Iranian envoys on the UN sidelines as "very good", a day after his General Assembly speech threatened to "annihilate" the regime, as UBS's CIO daily sets out. UBS's Paul Donovan calls it "playground diplomacy", with Qatar shuttling notes between the two. Ashmore Group points to resilient Hormuz flows and Saudi pipelines coming back online as the reasons crude gave back its gains.
Lazard Asset Management's Ronald Temple draws the sharpest line: Europe and Japan are fighting one inflation driver, energy, while the US faces several, and he adds accelerating rents to the list.
Resilience, not complacency: why the equity strategists say the bull can absorb higher rates
Morgan Stanley's Mike Wilson argues the market is in a mid-cycle transition, not complacency: more than 40% of the Russell 3000 is down at least 20% since June while median earnings grow about 15%. He keeps an 8,000 year-end target and favours large-cap quality and AI adopters over enablers.
UBS made the same case after Wednesday's selloff, when the 10-year rose above 5.1% for the first time since 2007 and October hike odds jumped to about 70%: higher yields need not derail markets with S&P 500 earnings forecast to grow 25% this year. UBP notes the Nasdaq 100 as the only bright spot in the week to 18 September, up 0.9%, and UBS's CIO argues for building resilience through capital preservation strategies, broad commodities and alternatives.
Economic calendar
Tue 29 Sep:
15:00 US Conference Board consumer confidence (Sep) prev 89.4
15:00 US JOLTS job openings (Aug) prev 7.27m
Wed 30 Sep:
07:00 UK GDP (Q2, final) prev 0.4% QoQ, 1.2% YoY
13:15 US ADP employment change (Sep) prev 38k
13:30 US core PCE price index (Aug), the Fed's preferred gauge prev 3.3% YoY, 0.2% MoM; released with the BEA annual revisions
13:30 US GDP (Q2, third estimate) prev 1.5% annualised
18:30 Fed's Barkin speaks
Thu 1 Oct:
13:30 US initial jobless claims
15:00 US ISM manufacturing PMI (Sep) prev 54.6; prices paid prev 71.1
Fri 2 Oct:
10:00 Eurozone CPI flash (Sep) prev 3.2% headline, 2.4% core
13:30 US non-farm payrolls (Sep) prev 162k; unemployment 4.1%; average hourly earnings 3.1% YoY
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