How growth, inflation and monetary policy affect global markets.
Morgan Stanley says concerns about returns on AI investment triggered by technology earnings weighed on US stocks and supported Treasuries. Meanwhile, Middle East supply risks pushed up oil prices, and noteworthy changes also emerged in European bond markets, the Bank of Japan and China’s monetary policy framework.
Morgan Stanley believes Treasury and AI-related corporate bond yields are jointly pushing up funding costs and broadening the correction in risk assets; the bank is holding off on adding interest rate risk ahead of the midterm elections and key economic data releases.
Manufacturing and non-manufacturing PMIs both came in below market expectations. Nomura believes the manufacturing decline mainly reflected seasonal factors, but the divergence between production and orders and weakness in construction show that underlying growth momentum remains soft.
Euro cross shorts have continued to profit recently. JPMorgan is tightening profit-taking levels while retaining positions in currencies including the US dollar, British pound and Norwegian krone. The bank believes high energy prices and interest-rate differentials still favor some higher-yielding currencies, but weakness in US technology stocks and central bank meetings are important variables.
Intermediate rates in developed markets have retreated from early-October highs, with growth concerns replacing some fears of rate hikes. JPMorgan believes valuations have become less cheap, favors German bonds over US Treasuries, and maintains its US yield curve steepening view.
Asset allocation managers tracked by Citi remain positive on equities and commodities, but have reduced their allocation to emerging-market equities outside China and cut European bond duration since last month.
Citi’s monthly conference call expects China’s economic growth to slow to 4.2% in 2027, with the growth target potentially lowered to “around 4.5%.” Participants advocated greater fiscal expansion than in Citi’s baseline scenario and expected pressure on real estate investment to outlast the period of home price adjustment.
Taiwan’s GDP grew 14.4% year over year in the third quarter of 2026, exceeding market expectations. Faster capital formation lifted domestic demand’s contribution above that of net exports, and JPMorgan raised its growth forecasts for 2026 and 2027 to 12.7% and 6.1%, respectively.
BofA’s relaunched real-time model estimates that the global economy grew at an annualized quarter-on-quarter rate of 3.7% in the third quarter of 2026, above the 3.4% aggregate forecast from its economists; emerging markets account for the bulk of the gap.
US third-quarter GDP growth rose to an annualized 3.4% from the previous quarter, supported by both AI investment and consumer spending. Morgan Stanley believes productivity gains allow the economy to accommodate faster growth, but an oil price shock and a broadening of demand could alter the rate-hike path.
Citi believes long-term memory-chip agreements will make South Korea’s exports and current-account surplus more durable, while employee bonuses, corporate tax payments and shareholder returns will gradually feed through to domestic demand. The bank expects the Bank of Korea to raise rates twice, taking the terminal rate to 3.5%.
US core inflation remains high, while investment and consumption support third-quarter growth. Nomura believes that after pausing rate hikes in October, the Fed will hike once more in December and hold rates steady throughout 2027.
Nomura has turned more bearish on the dollar amid weakness in US technology stocks and slowing inflows into securities; its highest-conviction trades are short USD/CNH and receiving Hong Kong short-term rates.
Nomura raised its conviction in a short USD/CNH trade from 4/5 to 5/5, forecasting an exchange rate of 6.50 at year-end. Corporate foreign exchange conversion, year-end seasonality and the policy environment are its main grounds.
Core CPI and PPI both rose faster month over month in September than in the prior month, but institutions disagree on whether price pressures will persist. After leveraged positions in US stocks were unwound, changes in earnings and interest rates became central to valuation assessments.
BofA expects the Bank of Japan to hold its interest rate at 1.25% in October and judge for the first time that underlying inflation has broadly reached its 2% target. The bank still expects a rate hike in December, but markets have already priced in considerable tightening.
China’s infrastructure investment has shifted from growth in previous years to contraction, while local land revenue and the borrowing capacity of financing vehicles are both constrained. Barclays believes the latest round of leadership transitions could still spur investment, but both its funding sources and destinations will change.
The Federal Reserve kept rates at 3.75%–4.00%, with two officials favoring a hike. Markets read the meeting as slightly dovish but still bet on a hike in December; Morgan Stanley expects fewer subsequent hikes than markets have priced in.
Based on volatility pricing in US dollar interest-rate options, Morgan Stanley selects trading structures for rising and falling rates and for yield-curve steepening and flattening; costs, maximum returns and the risks of selling options differ.
US real GDP grew at an annualized quarter-on-quarter rate of 3.4% in the third quarter, with strong consumption and investment in AI-related equipment; Goldman Sachs expects consumption to slow as fiscal stimulus fades, bringing fourth-quarter growth down to 1.8%.
