- Interest rates and the cost of the AI investment boom are the two issues that matter most this week, with three major central banks making policy decisions while Microsoft, Alphabet and Amazon report earnings.
- The Federal Reserve takes centre stage on Wednesday. It raised rates by 25 basis points in September, but 94 of 100 economists surveyed by Reuters expect it to leave the target range unchanged at 3.75% to 4% this time. Attention therefore moves to December and whether stubborn inflation requires another increase.
- Traders will not have long to assess the Fed’s message. Third quarter US GDP and September PCE inflation arrive on Thursday, providing fresh evidence on growth and price pressures less than 24 hours later.
- Equity markets face their own test. Microsoft and Alphabet report after Wednesday’s Fed decision, with Amazon following on Thursday. All three are spending heavily to meet demand for AI and cloud computing. The issue is increasingly whether that investment continues to produce sufficient revenue and profit growth.
- UK traders also have the Budget on Wednesday, while the ECB and Bank of Japan complete a week in which interest rates, government borrowing and corporate spending all come under examination.
Your Week At A Glance
Monday 26 October
- A relatively quiet start for major economic data.
- Markets position ahead of Wednesday’s Federal Reserve decision.
- Earnings season begins to accelerate ahead of the major technology reports later in the week.
Why it matters: Monday provides something of a calm before the main events. With the Fed, UK Budget and several of the largest technology companies still to come, positioning rather than economic releases may set the tone.
Tuesday 27 October
- US Consumer Confidence for October at 2:00pm UK time.
- The Federal Reserve begins its two day policy meeting.
- UPS reports third quarter earnings.
- Boeing reports third quarter earnings.
Why it matters: Consumer confidence weakened in September, particularly around employment prospects. UPS also provides a useful look at shipping volumes and business activity, but traders are likely to spend much of Tuesday preparing for the Fed.
Wednesday 28 October
- UK Budget at approximately 12:30pm UK time.
- Federal Reserve interest rate decision at 6:00pm UK time.
- Fed press conference at 6:30pm UK time.
- Microsoft reports fiscal first quarter results.
- Alphabet reports third quarter results.
Why it matters: This is the week’s most important session. Sterling and gilts face the Budget before attention switches to US interest rates and then two companies with enough index weight to influence the direction of the Nasdaq 100 and S&P 500.
Thursday 29 October
- US third quarter GDP at 12:30pm UK time.
- September PCE inflation and consumer spending at 12:30pm UK time.
- ECB interest rate decision at 1:15pm UK time.
- Amazon reports third quarter results.
Why it matters: The Fed’s message gets an immediate economic test. GDP and PCE could alter expectations for December, while the ECB decision puts the euro and European bonds in focus before Amazon returns attention to AI investment.
Friday 30 October
- Bank of Japan monetary policy decision and updated economic outlook.
- Euro area preliminary third quarter GDP.
- US Employment Cost Index at 12:30pm UK time.
- ExxonMobil and Chevron report third quarter earnings.
Why it matters: The yen takes centre stage early in the session, before attention moves back to US wage pressures and energy earnings. The ECI is particularly relevant after the Fed meeting because persistent wage growth can make inflation harder to bring down.
What Matters Most This Week?
The Fed Pauses, But What Happens in December?
Key points
- September brought a 25 basis point rate increase.
- Economists overwhelmingly expect rates to remain unchanged this week.
- Thursday’s GDP and PCE figures could quickly alter expectations for December.
The rate decision itself may be the least interesting part of Wednesday’s Fed meeting. Markets already have a fairly strong consensus. A Reuters poll found 94 of 100 economists expect rates to remain at 3.75% to 4%, while all 100 expect another increase in December.
That shifts attention to the Fed’s assessment of inflation and the economy. August PCE inflation stood at 3.4%, with core inflation at 3%. Both remain well above the Fed’s 2% objective.
Treasury yields and the dollar should provide the clearest indication of how traders interpret the meeting. A stronger signal that another increase is likely could push yields higher and put pressure on rate sensitive growth shares.
The complication is Thursday’s data. GDP and PCE inflation arrive the following morning. Strong growth combined with persistent inflation would support the case for another increase. Softer figures would make December less straightforward.
The first reaction to Wednesday’s Fed decision may therefore prove less important than where markets are trading 24 hours later.
Microsoft, Alphabet and Amazon Test the AI Investment Case
Key points
- Microsoft and Alphabet report on Wednesday.
- Amazon follows on Thursday.
- Cloud growth, AI demand and capital spending matter more than headline earnings alone.
Microsoft enters the week after Azure revenue grew 43% in its previous quarter. Microsoft Cloud revenue reached $59.3 billion, while management said customer demand for Azure continued to exceed available capacity.
That creates a high bar. Traders should watch Azure growth and management’s comments on infrastructure spending. Strong demand is positive, but the amount required to build data centres and add computing capacity is becoming equally important.
Alphabet faces a similar question. Google Cloud revenue increased 82% to $24.8 billion in the second quarter, while Search revenue continued to grow despite concerns that AI could change how consumers find information online.
Amazon completes the picture on Thursday. AWS sales grew 37% last quarter, its fastest growth in 18 quarters, reaching $42.2 billion.
The three reports matter far beyond the individual shares. Microsoft, Alphabet and Amazon have substantial weight in major US indices, while their spending plans affect semiconductor manufacturers, data centre operators and other companies exposed to AI infrastructure.
For traders, the key question is simple. Is AI related revenue still growing quickly enough to justify the scale of investment?
The UK Budget Faces a Gilt Market Test
Key points
- The Budget is delivered on Wednesday at approximately 12:30pm.
- The OBR publishes updated economic and fiscal forecasts.
- Fiscal headroom and borrowing assumptions are likely to matter more than individual announcements.
The Budget is the main domestic event for UK markets, and the starting position is uncomfortable.
Government borrowing reached £24.52 billion in September, while public debt moved above £3 trillion. Borrowing during the first six months of the financial year was also around £6 billion higher than the OBR had forecast before the conflict with Iran began.
The Chancellor has repeatedly stressed fiscal discipline. The question for bond investors is how much room the government leaves itself against its fiscal rules.
Economists surveyed by Reuters estimated that headroom had fallen to around £10 billion to £12 billion from £23.6 billion in March. They suggested rebuilding the buffer to roughly £15 billion to £16 billion would help reassure bond investors.
Gilts are therefore the market to watch first. A Budget seen as credible on borrowing could ease some pressure on yields. A thin fiscal buffer could have the opposite effect.
Sterling may respond as well, while individual tax measures could affect banks, retailers, housebuilders and other UK focused shares.
ECB and BOJ Keep Rates in Focus
Key points
- The ECB decides rates on Thursday.
- The Bank of Japan follows on Friday.
- Both are expected to pause after raising rates in September.
The ECB is widely expected to leave its deposit rate at 2.50%. A Reuters poll found 70 of 73 economists expect no change this week, but 64 expect another 25 basis point increase in December.
That makes guidance more important than the decision itself. Inflation remains elevated, while higher energy prices and rising bond yields make the policy decision less comfortable.
The euro and European government bonds are the obvious markets to watch. Any stronger indication that December will bring another increase could support the euro while putting further pressure on bond prices.
The Bank of Japan faces a similar decision from a different starting point. It is expected to leave rates unchanged on Friday after increasing them in September, but reports suggest it could raise its inflation forecast and leave open the possibility of another increase in December.
That puts the yen in focus. Traders should pay particular attention to the inflation outlook and the BOJ’s description of future policy rather than concentrating solely on Friday’s rate decision.
US Data Gets the Final Say on Rates
Key points
- GDP and PCE arrive together on Thursday.
- The Employment Cost Index follows on Friday.
- Growth, inflation and wage pressures will all feed into the December rate debate.
The Fed will have made its decision before receiving three important pieces of economic information.
Second quarter GDP grew at an annualised 2.2%, while August PCE inflation stood at 3.4%. Thursday provides the first estimate of third quarter growth alongside September’s PCE figures.
Friday then brings the Employment Cost Index. Compensation costs increased 3.4% over the year to the second quarter, making the next reading useful for assessing whether wage pressures continue to ease.
The interaction between the figures matters more than any single number.
Strong growth, persistent inflation and firm wage increases would make the case for another Fed increase easier to defend. Softer growth and inflation would give policymakers more reason to wait.
Treasuries and the dollar are likely to react first, but the implications extend to equities. Higher expected rates increase the discount applied to future earnings, making highly valued technology shares particularly sensitive to changes in bond yields.
Key Takeaways
- Fed guidance on December could matter more than Wednesday’s rate decision.
- US GDP and PCE inflation provide an immediate test of the Fed’s position.
- Microsoft, Alphabet and Amazon put AI spending and cloud growth under examination.
- The UK Budget could move sterling and gilts if borrowing forecasts surprise.
- ECB guidance will be important for the euro and European government bonds.
- The BOJ’s inflation outlook could matter more for the yen than the rate decision itself.
- Friday’s Employment Cost Index provides a final check on US wage pressures.
- Bond yields remain the key link between this week’s central bank decisions, economic data and equity valuations.