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Overview
U.S. third-quarter GDP exceeded expectations on accelerating investment and robust consumption.
The September PCE rebound showed headline inflation rising, but core inflation has not spiraled out of control.
The Fed meeting affirmed strong economic growth, with fighting inflation still the policy priority.
Our assessment: the latest GDP and PCE data support a December rate hike expectation, but this hiking cycle will not last too long.
On the long-end U.S. Treasury yield outlook: the 10-year yield surged and retreated in the third quarter, and the 5.3% high may have been this year's peak.
First: U.S. Third-Quarter GDP Beat Expectations — Investment Accelerated, Consumption Stayed Strong
U.S. third-quarter GDP released on October 29 grew 3.4% quarter-on-quarter, above the market expectation of 3.2% and the prior reading of 2.2%, indicating the economy maintained strong expansion, driven mainly by AI-related investment, resilient consumption, and federal spending. Looking at the component contributions: 1) Private investment became the main growth engine (+3.27%). The contribution from private investment was significantly higher than that from consumption, which is uncommon in recent years and is most likely related to AI-related data centers, computing equipment, and supporting energy infrastructure investment. 2) Private consumption remained resilient (+2.52%). The consumption contribution was stable, without a notable slowdown. With the wealth effect still in place, household consumption continued to provide a floor for the economy. 3) The net export drag widened substantially (-3.32%), the most noteworthy change this quarter. Against the backdrop of strong private investment, robust domestic investment is spilling overseas through the import channel. 4) The government contribution was modest (+0.9%). Fiscal support for growth was limited, consistent with the current relatively restrained fiscal policy stance. In addition, AI-related investment has remained elevated for two consecutive years, supporting the economy's strong expansion.
Second: September PCE Rebound — Headline Inflation Rebounded, but Core Inflation Has Not Run Away
The latest September PCE data released by the BEA showed headline PCE rose 0.5% month-on-month, rebounding in line with expectations, mainly confirming the earlier rise in energy items in PPI and CPI. Core PCE, the market's main focus, rose 0.3% month-on-month, without the above-0.4% upside surprise spreading, indicating that core goods and Super Core inflation have not run out of control, and the inflation rebound is still concentrated in supply-side and upstream energy costs.
Third: Fed Meeting Affirmed Strong Growth, Fighting Inflation Remains the Policy Focus
The October FOMC kept the federal funds rate target range unchanged at 3.75%-4.00%. On October 28, the FOMC voted 10-2, with the two dissenters supporting a 25-basis-point hike. The meeting statement upgraded its assessment of economic growth and continued to stress that inflation remains elevated. The statement described economic activity as "expanding at a strong pace," a clear upgrade from the previous "solid." It also emphasized the resilience of domestic spending, robust capital investment, and employment growth keeping pace with the labor force. The statement reiterated that inflation remains high and stressed that the cumulative effect of more information will help the Committee determine the appropriate policy stance, firmly ensuring inflation returns to the 2% target in a timely manner.
Fourth: Our Assessment — The Latest GDP and PCE Data Support December Rate Hike Expectations, but This Hiking Cycle Will Not Last Too Long
We previously judged that the October FOMC might deliver a hawkish pause, and that hot data and standing pat in October are not contradictory. After the Fed hiked 25bps at the September FOMC meeting, it may have chosen to stay put in October to give relatively high Treasury yields more time to tighten financial conditions, while preserving policy flexibility and an observation window and pushing the real policy decision point to the December meeting. Looking ahead, we believe the Fed will continue to hike in December, but this hiking cycle is unlikely to repeat the sustained tightening of the Greenspan era. The rationale: inflationary factors exist but are not prominent. 1) On the supply side, tariffs and energy are one-off shocks; although the current energy impact is lasting longer, causing market concerns about a second shock, inflation expectations remain broadly stable at around 2.3% and have not run out of control. 2) On the demand side, compared with the core transmission chain in the 2022 hiking cycle — the wage-price spiral — no such spiral currently exists. On the growth front: AI investment supports economic resilience, but the segments with high leverage and reliance on external financing are more sensitive to financial conditions, so the room to withstand continued rate hikes may also be limited.
Fifth: Long-End U.S. Treasury Yield Outlook — The 10-Year Yield Surged and Fell Back in the Third Quarter, and the 5.3% High May Have Been This Year's Peak
Our forward-looking judgment on the long-end U.S. Treasury yield trajectory has been continuously validated. As early as the May 6 "Summer Cold Wind" series reports, we proactively flagged the "gray rhino" risk of rising U.S. Treasury yields, judging that the 10-year Treasury yield could break above 5% in the third quarter and touch around 5.3% in an extreme scenario. As Treasury yields rose rapidly, we further pointed out that the long-end rise was not only driven by higher real rates; in a high-volatility environment, declining market liquidity and short-term trading factors also amplified market swings, and the market reaction may already have been excessive. On October 5, we further made clear that the Treasury turmoil could be approaching a turning point, that the rapid rise in long-end yields was unsustainable, and that a high-level oscillation and pullback in October was a high-probability event. Subsequently, the 10-year Treasury yield touched a high of 5.36% around October 14 and then retreated. Looking ahead, we believe the prior judgment logic still holds, and the market's reaction to macro risks may already be fairly complete. In our October 18 report "U.S. Treasury Yields Fall as Expected — 2026 U.S. Treasury Logic Review and Outlook," we proposed that over the medium to long term, long-end U.S. Treasury yields align with fundamentals: 1) On U.S. economic fundamentals, AI investment and consumption remain the main supports, and domestic demand is overall strong; if AI investment growth continues to lift potential growth and the equilibrium real rate in coming quarters, the corresponding long-end yield level will also be higher; conversely, if AI investment growth later slows more than expected, then the early-October long-end high may prove to be the major peak of this AI cycle. 2) In addition, short-term inflation stickiness persists; September CPI and PPI showed that upstream cost pressure has not risen overall, but downstream services (especially housing and transportation services) show "last-mile" stickiness, indicating that upstream supply-side shocks are shifting down the industrial chain. Over the long term, however, the rapid diffusion of AI applications may systematically lower the inflation center. 3) On U.S. Treasury supply and demand, over the medium term, the resilience of the U.S. economy and historically relatively high yield levels enhance the allocation appeal of Treasuries. In the short term, however, long-duration issuance by AI companies coexists with fiscal issuance, which constrains the room for term premiums to fall.
First: U.S. Third-Quarter GDP Beat Expectations — Investment Accelerated, Consumption Stayed Strong
U.S. third-quarter GDP released on October 29 grew 3.4% quarter-on-quarter, above the market expectation of 3.2% and the prior reading of 2.2%, indicating the economy maintained strong expansion, driven mainly by AI-related investment, resilient consumption, and federal spending. Looking at the component contributions: 1) Private investment became the main growth engine (+3.27%). The contribution from private investment was significantly higher than that from consumption, which is uncommon in recent years. Combined with the current macro backdrop, this is most likely related to AI-related data centers, computing equipment, and supporting energy infrastructure investment. The dominant role of investment in growth shows that this expansion still has a clear capex-driven character, rather than being driven purely by overheated consumption. 2) Private consumption remained resilient (+2.52%). The consumption contribution was stable, without a notable slowdown. With the labor market continuing its "low hiring, low firing" pattern and the wealth effect still in place, household consumption continued to provide a floor for the economy. The combination of consumption and investment is the fundamental reason third-quarter growth was able to reach 3.4%. 3) The net export drag widened substantially (-3.32%), the most noteworthy change this quarter. Against the backdrop of strong private investment, robust domestic investment is spilling overseas through the import channel. 4) The government contribution was modest (+0.9%). Fiscal support for growth was limited, consistent with the current relatively restrained fiscal policy stance. In addition, AI-related investment has remained elevated for two consecutive years, supporting the economy's strong expansion.
Second: September PCE Rebound — Headline Inflation Rebounded, but Core Inflation Has Not Run Away
The latest September PCE data released by the BEA showed headline PCE rose 0.5% month-on-month, rebounding in line with expectations, mainly confirming the earlier rise in energy items in PPI and CPI. Core PCE, the market's main focus, rose 0.3% month-on-month, without the above-0.4% upside surprise spreading, indicating that core goods and Super Core inflation have not run out of control, and the inflation rebound is still concentrated in supply-side and upstream energy costs.
Third: Fed Meeting Affirmed Strong Growth, Fighting Inflation Remains the Policy Focus
The October FOMC kept the federal funds rate target range unchanged at 3.75%-4.00%. On October 28, the FOMC voted 10-2, with the two dissenters supporting a 25-basis-point hike. The meeting statement upgraded its assessment of economic growth and continued to stress that inflation remains elevated. The statement described economic activity as "expanding at a strong pace," a clear upgrade from the previous "solid." It also emphasized the resilience of domestic spending, robust capital investment, and employment growth keeping pace with the labor force. The statement reiterated that inflation remains high and stressed that the cumulative effect of more information will help the Committee determine the appropriate policy stance, firmly ensuring inflation returns to the 2% target in a timely manner.
Fourth: Our Assessment — The Latest GDP and PCE Data Support December Rate Hike Expectations, but This Hiking Cycle Will Not Last Too Long
We previously judged that the October FOMC might deliver a hawkish pause, and that hot data and standing pat in October are not contradictory. After the Fed hiked 25bps at the September FOMC meeting, it may have chosen to stay put in October to give relatively high Treasury yields more time to tighten financial conditions, while preserving policy flexibility and an observation window and pushing the real policy decision point to the December meeting. Looking ahead, we believe the Fed will continue to hike in December, but this hiking cycle is unlikely to repeat the sustained tightening of the Greenspan era. The rationale: inflationary factors exist but are not prominent. 1) On the supply side, tariffs and energy are one-off shocks; although the current energy impact is lasting longer, causing market concerns about a second shock, inflation expectations remain broadly stable at around 2.3% and have not run out of control. 2) On the demand side, compared with the core transmission chain in the 2022 hiking cycle — the wage-price spiral — no such spiral currently exists. On the growth front: AI investment supports economic resilience, but the segments with high leverage and reliance on external financing are more sensitive to financial conditions, so the room to withstand continued rate hikes may also be limited.
Fifth: Long-End U.S. Treasury Yield Outlook — The 10-Year Yield Surged and Fell Back in the Third Quarter, and the 5.3% High May Have Been This Year's Peak
Our forward-looking judgment on the long-end U.S. Treasury yield trajectory has been continuously validated. As early as the May 6 "Summer Cold Wind" series reports, we proactively flagged the "gray rhino" risk of rising U.S. Treasury yields, judging that the 10-year Treasury yield could break above 5% in the third quarter and touch around 5.3% in an extreme scenario. As Treasury yields rose rapidly, we further pointed out that the long-end rise was not only driven by higher real rates; in a high-volatility environment, declining market liquidity and short-term trading factors also amplified market swings, and the market reaction may already have been excessive. On October 5, we further made clear that the Treasury turmoil could be approaching a turning point, that the rapid rise in long-end yields was unsustainable, and that a high-level oscillation and pullback in October was a high-probability event. Subsequently, the 10-year Treasury yield touched a high of 5.36% around October 14 and then retreated. Looking ahead, we believe the prior judgment logic still holds, and the market's reaction to macro risks may already be fairly complete. In our October 18 report "U.S. Treasury Yields Fall as Expected — 2026 U.S. Treasury Logic Review and Outlook," we proposed that over the medium to long term, long-end U.S. Treasury yields align with fundamentals: 1) On U.S. economic fundamentals, AI investment and consumption remain the main supports, and domestic demand is overall strong; if AI investment growth continues to lift potential growth and the equilibrium real rate in coming quarters, the corresponding long-end yield level will also be higher; conversely, if AI investment growth later slows more than expected, then the early-October long-end high may prove to be the major peak of this AI cycle. 2) In addition, short-term inflation stickiness persists; September CPI and PPI showed that upstream cost pressure has not risen overall, but downstream services (especially housing and transportation services) show "last-mile" stickiness, indicating that upstream supply-side shocks are shifting down the industrial chain. Over the long term, however, the rapid diffusion of AI applications may systematically lower the inflation center. 3) On U.S. Treasury supply and demand, over the medium term, the resilience of the U.S. economy and historically relatively high yield levels enhance the allocation appeal of Treasuries. In the short term, however, long-duration issuance by AI companies coexists with fiscal issuance, which constrains the room for term premiums to fall.
Analysts for this report: Zhang Yidong, SFC HK license number BIS749; Liu Nianyun, SFC HK license number BXH708.
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