AFS Markets Blog: Midday 28/10/2026

• Meanwhile in markets, punters are diligently waiting for the FOMC meeting tonight. With little in the way of headlines and the budget drama in France off the front pages, Bund and UST yields and European equities and US equity futures move little. Which is an opportune moment to take a closer look at tonight’s FOMC meeting;

• Only a couple of basis points in hikes are priced for tonight. Which is definitely going to be a hold. With both New York Fed President Williams and Vice Chairman Jefferson guiding for a hold, Chairman Warsh trying to ram through a hike would be highly contentious, to say the least. Predictably, a hike would invoke President Trump’s wrath. No surprises here. But Warsh overruling the other two key FOMC members, who aren’t exactly Trumpkins, would look highly political on the eve of the midterms. So, yes Warsh must ignore that hot September CPI print. And stomach his pride and deliver an unquestionable hold. Given his well-known dislike of forward guidance, he probably won’t like having been boxed in by Williams and Jefferson. However, the upside for Warsh is that he’s spared a clash with Trump;

• The focus is on the December FOMC, where a 25bps rate hike is no longer fully priced in. At pixel time, I clock 22bps of hikes priced in. Which is a bit higher than the 20bps we saw earlier in the week though. I think the Fed will hike by 25bps In December, given that the Fed statement explicitly reads that the FOMC wants a timelier return to two percent inflation (re the tightening bias). Which has also been Warsh’s message in his press conferences all along;

• When I look at the constellation of US economic data and the mission of a timelier return to two percent inflation, a hike in December is inevitable. Monthly readings for PCE core inflation have averaged 3.0% this year, up from 2.5% in 2025. Cleveland Fed nowcasts show no improvement is in sight. Economic growth, or at least private sector demand, has accelerated to about three percent, up from 2.5% last year The unemployment rate has stayed low, having fallen from around 4.5% a year ago to 4.1%-4.2% currently. Underemployment has also fallen while payrolls growth has inched up to an average 70k a month, which compares with an average monthly increase of 10k last year;

• Interestingly, my Taylor rule with high inertia – a factor for the Fed’s delayed response to changing economic conditions that gives the best historical fit for the modelled overnight rate – points to no further rate increases. Without inertia, I only arrive at two additional quarter point hikes. Since Warsh wants a timelier return, more tightening than the Taylor rule calls for seems justified;

• I am sure in the weeks ahead the debate will return if the Fed is going to hold again in December, or perhaps even surprise with a 50bps hike to make up for the delay this month. I am not sold on the idea of a jumbo hike. I think it would require underlying inflation to accelerate. I am not seeing that happen;

• For the Fed to hold rates in December, on the other hand, at least one of the following conditions must be met (I am discounting the US economy suddenly heading south, which is unlikely to happen in the next six weeks). The AI boom/bubble truly bursting. We’re talking about more than just some of the froth coming out of AI equities. Instead, think of AI equity prices going in full reverse and erasing much of the wealth effect from triple-digit gains for single stock names. And credit stress widening beyond the usual suspects (CoreWeave and Oracle) and infecting strong(er) names like Microsoft, Alphabet, or Nvidia);

• Second on my list of conditions that will force a hold is a happy ending in the Iran war with a lasting deal between Washington and Tehran. As an armchair geopolitical expert, I am not so sure which way the winds are blowing. I used to be quite bullish on a deal, reasoning that the conflict is politically too costly for Trump. And true indeed, the political price is a high as the Republicans are now likely to lose both the House and the Senate next week. But that hasn’t brought us closer to a deal. Of course, a Deus Ex Machina October surprise is still possible. And, on cue, Reuters reported this morning that Qatari mediators presented officials in Tehran with a new draft deal. However, I am not holding my breath for that one. The peace headlines in the Ukraine war are comparatively positive. In the Iran war, they’re absent save for the faintest pulse;

• Turning to some lunchtime market commentary, US Treasury yields are motionless. The 10y at 5.01 and the 30y at 5.31 mean that we’re close to the lowest level in a month. European equities are in the red, but losses are modest. The Stoxx 50 is down just 0.2%. S&P 500 futures are up marginally. In FX space, the broad dollar is flat. More importantly, with the French 10y Bund spread only modestly below the highs (at 158bps at pixel time) the euro remains in the red versus both the greenback and the Franc;

• Brent crude and Dutch natural gas futures prices have erased earlier declines as the hopium from the Qatar deal headline fades. Perhaps punters are paying more attention to the overnight Wall Street Journal story about the US warning its Gulf allies of a possible short but intense airstrike campaign on Iran right after the midterms. At pixel time, Brent futures were at $115.1 a barrel, which is about halfway between the low and the high of the week. Dutch natural gas futures have rallied to 99.2 euros per MWh, putting the psychological level of 100 within touching distance;

• Looking ahead, eyes will be on the FOMC meeting tonight. We have the Bank of Canada meeting before, which should be a hold too.

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