Top of the Morning: FOMC reflections & US economic update

Andrew Dubinsky · UBS

Fed will likely hike again in December and March; the October hold was a compromise.

The Fed held in October, which was not a surprise, but the statement called economic activity strong and two members dissented in favour of a hike. The chair leaned on improvements since the September hike rather than the bad inflation data, and guided to gradual policy adjustments rather than a large cycle. Dubinsky reads the broad support for the hold as a compromise: members did not dissent in exchange for high confidence that there would be at least a hike in December. His view is still a December hike and another in March, because little new inflation data arrives before the December meeting to derail inflation that is elevated at slightly over 3%. He would revisit if financial conditions tightened enough to substitute for a March hike, which could mean one fewer hike.

“So our view is still another hike in December and another hike in March because there's just not a lot of new inflation data in between.”at 2:25

Andrew Dubinsky · UBS

Middle East conflict and supply-chain pressures are upside risks that skew inflation risks higher.

Dubinsky says there is still a pretty kinetic conflict in the Middle East, and supply-chain upside risks still seem quite relevant and have not improved much. Together with AI demand pressure, these upside risks are not looking favourable, so the skew of risks for inflation is unfavourable. These are among the key factors the Fed and UBS are watching, and they could change the outlook.

“Obviously we still have a pretty kinetic conflict in The Middle East and supply chain upside risk still seem quite relevant and haven't improved that much.”at 4:00

Andrew Dubinsky · UBS

US growth is strong; Q3 GDP at 3.4% reflects robust private demand and AI-linked investment.

Growth in the first half of the year was in the mid-2% range, and the first estimate for Q3 came in at 3.4%, above expectations. Dubinsky cites very strong private demand, with strong consumption and really strong business investment linked to the AI capex cycle. He calls the growth picture quite strong and says there is no way to avoid saying so.

“Growth is quite strong. The first half of the year in the mid 2% range for growth and this third quarter we have the first estimate at 3.4% which is a little bit above the expectations.”at 5:05

Andrew Dubinsky · UBS

AI-linked business investment is a very strong driver of current US economic growth.

In describing the strong Q3 GDP print, Dubinsky points to very strong private demand, including really strong business investment linked to the AI capex cycle. He presents this as one of the drivers of the strong growth backdrop. He does not discuss its longer-term durability.

“and really strong business investment linked to the AI, CapEx cycle.”at 5:31

Andrew Dubinsky · UBS

US consumer spending will moderate toward roughly 2% growth, not slow sharply.

Consumer spending has been growing faster than income, and some of today's monthly data showed slowing. Dubinsky expects some moderation as a result, but not a dramatic slowdown. He expects spending to settle back closer to a roughly 2% pace.

“we do see some moderation in consumer spending because it has been growing at a faster clip than income... we're not looking for a dramatic slowdown but just something back closer to the 2% or so range.”at 5:45

Andrew Dubinsky · UBS

US inflation should fall to mid-to-high 2% by end of Q1 as oil and tariff shocks lap.

Inflation is still firm on a year-over-year basis and is slightly over 3% going into year end. Dubinsky expects the key supply shocks to hit their one-year anniversaries around the turn of the year: the oil price shock, and the large tariff-driven inflation. Lapping those shocks should bring year-over-year inflation down to the mid-to-high 2% range by the end of Q1. He expects inflation to remain above target into 2027, so the disinflation is gradual rather than a return to target.

“essentially a one year anniversary of really big tariff inflation and that should help year over year inflation rates come down to the mid to high 2% range as we get to the end of Q1.”at 6:35