US economy still running hot but bets on Fed hike cool

Bond traders pulled back their bets on the Federal Reserve hiking its benchmark interest rate this month as the central bank’s preferred gauge of inflation rose at a slower pace than economists expected, even as the yield on longer-dated bonds rose to fresh 24-year highs as the world’s biggest economy continues to grow at a rapid clip.

Tech stocks on Wall Street rallied on the shifting Fed outlook, with memory chipmaker Micron Technology’s quarterly result the next test for the artificial intelligence sector as the US Federal Trade Commission starts looking into whether OpenAI and Anthropic have underplayed the potential harm of the technology.

UK prime minister Andy Burnham said he will look at the option of Britain rejoining the European Union in a major policy review, while also saying his government believed Iran was behind a suspected terrorist incident at a Royal Air Force base that was thwarted by authorities over the weekend.

And Australia’s ASX is set to start to the month on the back foot, with futures pointing to a dip when trading opens across the Tasman, while Statistics New Zealand’s latest building consent data is due and the results of Heartland Group Holdings’ special meeting on merging with TSB Bank are expected this morning.

Steeper curves

CME’s FedWatch tool was pricing in a 37% chance of the Fed raising the federal funds rate by a quarter point to a range of 4%-to-4.25% from a 51% chance yesterday after core PCE inflation, the Fed’s favoured measure, slowed to an annual pace of 3% in August from 3.2% in July. That was below the 3.2% pace that economists had picked.

Meanwhile, the US Commerce Department raised its estimate for second-quarter gross domestic product growth to 2.2% from an earlier projection of 1.5%, and consumer spending expanded at a faster pace than expected.

Still, longer-dated US government bonds continued to decline, with the yield on 10-year treasuries up 6 basis points at 5.24% and the 30-year treasury yield hitting a new 24-year high as investors demanded a bigger return.

“US equities advanced as data pointed to resilient economic activity while a key inflation measure printed below expectations,” Bank of New Zealand senior interest rate strategist Stuart Ritson said in a note. “The S&P 500 was up around 0.5% in afternoon trading, with the Nasdaq outperforming, in contrast to weaker European equity markets.”

Wall Street welcomed the prospect of a pause by the Fed, with the tech-heavy Nasdaq Composite jumping 0.9% and the S&P 500 gaining 0.4% in late trading.

The Dow Jones Industrial Average bucked the trend, down 0.2% with Sherwin-Williams, Merck & Co and UnitedHealth Group at the bottom of the leaderboard.

Micron’s quarterly result after the bell is the next gauge of investor sentiment on the AI trade, which has been running hot and cold with a growing focus on whether it needs regulation.

Super safe

US President Donald Trump dismissed calls for federal regulation after a meeting with AI execs, although the FTC opened an investigation into Anthropic and OpenAI to work out whether the developers misled consumers about the potential harms posed by the technology.

Meanwhile, OpenAI accused Chinese rival Moonshot AI of trying to extract data from its GPT systems, and SpaceXAI was said to be overhauling the price options for its Grok chatbot and X social network.

Data centre infrastructure firm Accelevation opened below its initial public offering price, valuing the company at US$3.92 billion in its debut, and AI voice generation startup ElevenLabs was valued at US$22 billion in an employee tender offer.

Meanwhile, Bloomberg reported Trump was expected to announce plans for South Korea to invest US$200 billion in US energy projects, including eight nuclear power plants.

Across the Atlantic, Alphabet’s Google asked an EU court to pause regulators’ order to open its search data to OpenAI and rival search engines in its latest pushback on European rules aimed at curbing the power of Big Tech.

UK prime minister Burnham said rejoining the EU was an option he’d consider in a review of the nation’s European policy, saying Brexit had done more harm than good in a speech to a Labour party conference.

Separately, Burnham said his government believed Iran was behind the security incident that led to the arrest of five people on suspicion of preparing a terrorist act at an RAF base used by the US to launch strikes in the Middle East.

The Netherlands pulled back from plans to tax unrealised profits on investments after a backlash from business groups and investors that the 36% tax would undermine the nation’s attraction as an investment destination.

European stock markets were weaker, with the UK’s FTSE 100 down 0.3%, Germany’s DAX falling 0.8% and France’s CAC 40 declining 0.9%.

Australian futures pointed to a 0.3% decline for the S&P/ASX 200 index when trading opens, while the kiwi dollar traded at 55.34 US cents at 7am from 56.44 cents yesterday.

The Reserve Bank of Australia is due to release its financial stability review today, with trade data also due across the Tasman.

Local data include Stats NZ’s monthly building consents figures, while the results of Heartland’s special meeting on the TSB deal are also due today.

NZX-listed companies going ex-dividend today include Skellerup Holdings and Vulcan Steel.

Reporting by Paul McBeth. Image from Aditya Vyas on Unsplash.