UBS: Fed's Rate Hike Expectations Too Aggressive, Another Hike Expected in December

UBS Chief Investment Officer Mark Haefele and his team stated that the market's pricing of the Federal Reserve's tightening path is overly aggressive, and the actual rate hike may be lower than expected. After the 10-year U.S. Treasury yield broke above 5.1%, federal funds futures indicated a 70% probability of a rate hike in October. However, UBS's baseline scenario remains that the Fed will hike rates once more in December and then keep rates unchanged. UBS expects that the annual revision by the Bureau of Economic Analysis will lower core PCE inflation by 0.2 percentage points, with inflation likely to steadily decline over the next six months. The median rate forecast from Fed officials indicates that rates will remain unchanged throughout 2027, suggesting that the basis for consecutive large rate hikes is weakening. UBS also noted that the U.S. composite PMI rose to 58.4 in September, indicating that economic activity remains resilient, which is favorable for corporate revenue and profit growth. The firm maintains a "attractive" rating on fixed income assets, expecting the S&P 500 index to grow earnings by 25% this year and 14% in 2027. Regarding gold, UBS believes it still faces pressure from high interest rates and a strong dollar in the short term, but views a pullback in gold prices to around $4,000 per ounce as a buying opportunity, expecting prices to rise to $5,400 around September 2027.