Fed Holds as US Growth and Diplomatic Talks Shape Markets (2 – 6 November)

Financial markets entered November as investors assessed the Federal Reserve's latest policy decision and the outlook for another rate hike in December. The Dollar Index held near 102 after a volatile week, while US Treasury yields remained close to seven-week lows. The Fed kept its benchmark rate at 3.75%–4.00%, citing resilient economic activity and persistent inflation. Markets still assign roughly a 75% probability to a December hike, with attention now turning to October employment figures, ISM surveys, and comments from Fed officials.

Middle East developments continued to influence energy prices and inflation expectations. Brent crude fell below $111 as Qatar-mediated negotiations with Iran raised hopes of avoiding renewed military action before the US midterm elections. Lower oil prices provided some relief to gold and silver, while easing concerns over technology stocks reduced demand for traditional safe-haven assets. In Europe, French fiscal uncertainty remained a concern despite the ECB's decision to leave rates unchanged, while UK markets prepared for a widely expected Bank of England hike.

Market Drivers & Catalysts

• Fed Holds Rates: The Federal Reserve maintained its benchmark rate at 3.75%–4.00%, although two officials supported another 25-basis-point increase.
• December Hike Expectations: Markets price approximately a 75% probability of another Fed rate increase in December, with upcoming employment and activity data expected to influence expectations.
• Middle East Diplomacy: Qatar-mediated talks with Iran continued as Washington ruled out new strikes before the midterm elections but kept military options open afterward.
• Oil Prices Retreat: Brent fell below $111 per barrel, while OPEC+ agreed to maintain current production targets through December.
• Strong US Growth: Third-quarter GDP expanded at an annualized 3.4%, supported by strong private investment and continued consumer spending.
• BoE Tightening in Focus: Markets almost fully price a November 5 rate hike, with further increases expected in February and July.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield hovered near 4.93%, close to a seven-week low, as investors awaited October employment figures, ISM surveys, and Fed commentary. Markets continued to price roughly a 75% probability of a December rate increase. Falling oil prices eased inflation concerns, while stabilizing technology stocks reduced some safe-haven demand for government bonds.
• UK 10-Year Bond Yield: UK 10-year gilt yields slipped below 5.3%, reaching their lowest level since September 22. Chancellor John Healey's first budget met the government's fiscal rules and avoided major surprises, although fiscal headroom was reduced to £15 billion. Investors remained focused on the November 5 BoE meeting, with markets almost fully pricing a rate increase followed by further tightening in February and July.
• Japan 10-Year Government Bond Yield: Japan's 10-year government bond yield fell below 2.8%, reaching a nearly three-month low after the BOJ maintained its benchmark rate at 1.25%. Policymakers acknowledged that inflation had reached the 2% target, supporting expectations for another hike in December. Board member Hajime Takata favored an immediate increase to 1.5%, while renewed interest from global asset managers provided additional support to Japanese government bonds.
• Germany 10-Year Bund Yield: Germany's 10-year Bund yield ended October near 3.34%, declining more than 20 basis points during the month to levels last seen in late August. French fiscal concerns and Middle East tensions supported safe-haven demand, while weaker Eurozone growth and an unexpected contraction in France added pressure. The ECB maintained its policy rates, with President Christine Lagarde confirming that another hike had been discussed but not supported.

Commodities

Gold recovered above $3,900 per ounce, rebounding from one-year lows as falling oil prices eased inflation concerns and expectations for further monetary tightening. Diplomatic efforts to prevent renewed US military action against Iran supported the decline in energy prices. Investors now await the October US employment report, with markets assigning approximately a 75% probability to a December Fed hike.

Silver climbed toward $50 per ounce, recovering modestly from nearly one-year lows as lower oil prices eased inflation and rate-hike concerns. The previous week's decline reflected persistent energy-driven inflation risks and selling pressure from AI-related equity losses. Investors remain focused on upcoming US employment data and expectations for another Fed increase in December.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index held near 102 following a volatile week as investors prepared for October's employment report, ISM surveys, and speeches from Fed officials. Markets continued to price approximately a 75% probability of a December hike. Lower oil prices and stabilizing technology stocks also reduced demand for safe-haven assets.
• Euro: The euro ended October near $1.12, losing more than 1% during the month and remaining close to a one-year low. French fiscal uncertainty continued to weigh on the currency after France unexpectedly contracted in the third quarter and government bond yields reached two-decade highs. The ECB unanimously maintained interest rates, with Lagarde confirming that a hike had been discussed without providing clear guidance on future policy.
• British Pound: Sterling advanced above $1.34, reaching its highest level since mid-September and gaining approximately 1% in October, its first monthly increase since August. Chancellor John Healey's budget brought few surprises, although fiscal headroom was reduced to £15 billion. Markets almost fully expect a BoE hike on November 5, followed by additional increases in February and July.
• Japanese Yen: The yen weakened toward 158 per dollar, ending a three-session recovery as concerns over the technology sector eased and safe-haven demand declined. Finance Minister Satsuki Katayama warned that authorities could respond to excessive currency movements. The BOJ held rates at 1.25%, while its assessment that inflation had reached the 2% target strengthened expectations for a possible December hike.

Economic Data Highlights

• Federal Reserve Interest Rate: The Fed maintained its benchmark rate at 3.75%–4.00% in October following September's first increase since 2023. Two policymakers favored another 25-basis-point hike. Officials described economic growth as strong, consumer spending as resilient, and inflation as elevated. Chair Kevin Warsh also announced plans to reduce the number of rate-voting meetings beginning in 2027.
• US Q3 GDP: The US economy expanded at an annualized 3.4%, accelerating from 2.2% in Q2 and exceeding forecasts of 3.2%. Private investment surged 19.4%, supported by AI-related spending, while consumption grew 3.8% and government spending increased 5.3%. Exports fell 5.7%, imports climbed 19.7%, and residential investment contracted.
• Japan Consumer Confidence: The consumer confidence index declined to 35.0 in October from 35.4, slightly below the 35.1 forecast and its lowest since July. Overall livelihood sentiment fell to 33.2 from 33.8, willingness to purchase durable goods reached 26.8, income growth expectations stood at 40.4, and employment prospects declined to 39.4 from 40.0.
• ECB Interest Rate: The ECB held its deposit rate at 2.50% and refinancing rate at 2.65% in October. Policymakers warned that elevated energy prices could increase inflation while weakening economic growth, although wage pressures remained limited. Lagarde confirmed that another hike had been discussed but unanimously rejected.

Macro Calendar Highlights

• Monday, November 2: US ISM Manufacturing PMI and S&P Global Manufacturing PMI.
• Wednesday, November 4: US ADP Employment Change, ISM Services PMI, S&P Global Services PMI, and Crude Oil Inventories.
• Thursday, November 5: Bank of England Interest Rate Decision, US Initial Jobless Claims, and Nonfarm Productivity.
• Friday, November 6: US Nonfarm Payrolls, Unemployment Rate, Average Hourly Earnings, and University of Michigan Consumer Sentiment.