You take the high road

• US equities, which advanced +1.20%
• Longer dated gilts – the ICE BofA UK Gilt 25yr+ index rose +3.74%, while UK inflation-linked gilts added +2.46% 

• Brent crude oil, which fell -12.02% in US dollar terms
• European ex-UK equities, which declined -0.83%

(All equity data is MSCI; all data in sterling unless stated)

Last week’s major central bank meetings saw divergent monetary policy responses, highlighting domestic idiosyncrasies. While higher energy prices are unquestionably a common challenge, domestic economic realities are prominent in policymakers’ thinking.

In a widely anticipated move, the US Federal Reserve (Fed) hiked interest rates for the first time since July 2023. An additional hike before the end of the year was also indicated. Until recently the Fed had been expected to remain on hold – as it has been all year – wary of a policy mistake. The rate setting Federal Open Markets Committee (FOMC) unanimously approved the 0.25% increase, deciding they could no longer look through prevailing inflationary pressures. Fed chair, Kevin Warsh, conceded that inflation has been too high for too long, while also noting recent economic data has shown growth to be resilient, and the US labour market robust. The decision reflects a concern that already stubbornly high inflation readings could be compounded by renewed energy-driven price pressures, spreading further through the economy, and becoming entrenched in expectations. But it also suggests the Fed believe the US economy to be on a solid enough footing to stomach higher rates.

In contrast to both the Fed and the European Central Bank (ECB) – which has hiked rates twice this year – the Bank of England (BoE) left interest rates unchanged at 3.75%. BoE governor, Andrew Bailey, commented that rising energy prices were so far having a “limited effect on price and wage setting in the UK”. Despite data released ahead of the Bank’s decision showing UK inflation had risen to 3.1% in August (from 2.9%), there is currently little evidence that energy-driven headline price pressures are seeping into core and services inflation prints. The UK labour market has also continued to soften. Nevertheless, the decision was finely balanced, with three of the nine members of the rate setting Monetary Policy Committee (MPC) voting to hike. A rate hike at the next meeting in November is a live possibility. Alongside the decision to hold, the BoE also announced that it would marginally slow the pace of its quantitative tightening (QT) programme, slowing sales of its stock of UK government debt.The move saw longer dated UK government borrowing costs pull back from recent highs.

Meanwhile, the Bank of Japan (BoJ) continued its gradual process of policy normalisation, raising rates by 0.25% to 1.25%. Japan’s policy challenge stems from the emergence of more durable inflation and wage growth. After two decades of deflation, Japan again has inflation. And the latest move reflects the growing acceptance that highly accommodative monetary policy is no longer necessary. However, the decision was not unanimous amongst BoJ policymakers, with the pace of policy normalisation still hotly debated. The move also comes after increased pressure from Washington, with US Treasury Secretary Scott Bessent calling for higher rates. Rising Japanese interest rates have implications for Japanese government fiscal policy, the yen and overseas sovereign debt held by Japanese investors, as highlighted in recent Insight Weekly articles.

Anthropic CEO, Dario Amodei, sparked further debate among tech leaders last week after suggesting that the industry needs better governance. Amodei cited AI’s rapid recursive self-improvement and recent security breaches as reasons to – what he called – “pace the frontier” of nascent technology. His prescription to maximise AI’s potential without causing societal harm included peer-review before a new model’s release, industry-wide coordination on safety and export controls to prevent critical technology from crossing borders. Other AI leaders weighed in – including Open AI’s Sam Altman, SpaceX’s Elon Musk and Nvidia’s Jensen Huang. President Trump labelled the need for guardrails a “hoax” – emphasising the importance, as he sees it, of “winning” the AI development race. Even King Charles III, at a long-planned AI summit in Scotland, spoke of AI’s existential dangers.

From doomsayers to prophets, views on AI can be polarising. The truth is likely not so extreme. And, despite all the hype, some of the prevailing valuations of key AI-related companies are not so extreme either. The world’s most valuable listed company, Nvidia, currently trades on just 14 times its estimated January 2028 earnings – hardly excessive for a tech darling. Given that both OpenAI and Anthropic will list on public markets at some stage, they perhaps have something to gain from promoting good governance: their investors will want growth, but perhaps not at any cost to ESG (the environmental, social and governance factors analysts scrutinise when assessing material risks). What’s clear, of course, is that when presidents and kings enter a debate, the topic is of sovereign importance.

Meanwhile, the US Senate rejected a sweeping cryptocurrency bill in a blow to developing more regulated and mainstream financial products. After months of bi-partisan wrangling, and intensive lobbying from industry, senators rejected the so-called Clarity Act by 49-50 votes.

The prospect of Canada becoming the European Union’s (EU) first ‘associate’ member was floated last week. European Commission President, Ursula von der Leyen, commented that the bloc wants to bring the relationship with Canada “to the highest possible level.” Canadian Prime Minister – and former governor of the BoE – Mark Carney, is keen on fostering a close economic and security alliance with the EU, with both sides looking to build on the 2017 EU-Canada free trade agreement. The precise details, including the structure and legal status of the proposed relationship, remain unclear. And some commentators questioned whether it would even be implementable. Nevertheless, the announcement is symbolically significant. Amid deteriorating trade relations between US and Canada, and a somewhat less predictable geopolitical backdrop, the move underscores the desire of both parties to form new agreements and partnerships.

In another example of Canada seeking to foster greater economic resilience, the inaugural Canada Investment Summit was also held last week. Over 100 global investors gathered in Toronto, for a summit which sought to mobilise some $1trn in total investment in Canada over the next five years. More than 160 projects were on offer, with a focus on large-scale energy and technology infrastructure. The summit was held in conjunction with two major Canadia Pension funds, which are among Canada’s largest institutional investors. Such investors could also help fund the infrastructure investment Canada needs if government policy can incentivise them to deploy more capital domestically. Around half of the money managed by major Canadian pension funds is thought to be deployed in the US, where the depth of capital markets is unrivalled.

• The US Supreme Court rejects Donald Trump’s plan to restrict postal voting ahead of midterm elections – The White House had sought to implement stricter requirements for postal ballots, which it was argued would counter electoral fraud
• Iran war cost to the US taxpayers – According to the nonpartisan Congressional Budget Office, the prolonged standoff in the Middle East has cost US taxpayers $38bn and counting
• Japan’s trade deficit widens – The trade deficit expanded beyond 1trn yen for the first time since January as higher oil prices pushed up Japan’s energy import bill. Exports growth beat expectations in August, although the rate slowed for the first time since February
• UK retail sales unexpectedly rose in August, defying forecasts of a decline – Despite higher fuel prices, sales volumes rose 0.5% (vs expectations of a -0.2% decline) according to the Office for National Statistics (ONS). However, there was also some evidence that rising household costs were beginning to bite
• US Private credit default rate rises – According to ratings agency Fitch, the US private credit default rate reached 6.3% for the trailing 12 months through August. The rate has remained above 6% since April
• China’s domestic demand remains weak – Retail sales slowed to 0.4% year-on-year in August, weaker than expectations. Auto sales were the biggest drag, down 18.5% year-on-year. External demand continues to support industrial activity, but weak consumption and investment persist
• US and Denmark reach deal over Greenland – The agreement over Greenland’s security seemingly resolves a diplomatic impasse, initiated by President Trump’s previously stated intention to acquire the semi-autonomous Danish territory. The detail of the agreement was not released. It is due to be signed this week

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