UBS: October Rate Hike Pricing Overdone; Core PCE Revision Down to Undermine Case for Consecutive Hikes
nashnova research
The US 10-year Treasury yield broke above 5.1%, a level unseen since 2007, and October rate-hike odds jumped to 70% — but UBS argues the market has priced in more tightening than fundamentals support, with a looming 0.2-percentage-point downward revision to core PCE set to weaken the case for consecutive hikes.
Where exactly has the market overshot?
Fed-funds futures now imply a 70% chance of an October hike, up from below 50%. The 10-year yield surged nearly 15 basis points in a single session.
UBS's base case: the Fed hikes once more in December, then holds. This means → the market is pricing a path UBS believes will not materialise.
The median dot in the Fed's own rate projections shows rates unchanged through all of 2027. In plain terms = even the Fed's forecast does not support the hawkish pricing the market has adopted.
Why is the core PCE revision the key variable?
The Bureau of Economic Analysis is about to run its annual revision, expected to cut core PCE inflation — the Fed's preferred price gauge, stripping out food and energy — by 0.2 percentage points.
Combined with favourable base effects in the first half of next year — last year's high price base makes year-on-year comparisons naturally softer — the rationale for aggressive back-to-back hikes weakens considerably.
This means → if the revision lands as expected, the market's 70% October-hike pricing could face a meaningful repricing lower.
PMI is booming — shouldn't the Fed hike?
The S&P Global US Composite PMI flash reading rose to 58.4 in September, the strongest private-sector expansion since July 2021.
UBS reads this the opposite way: strong economy ≠ must hike; strong economy = earnings support. This reflects UBS treating the PMI as a bullish equity signal, not a hawkish rates signal.
UBS forecasts S&P 500 earnings growth of 25% this year and 14% in 2027; MSCI World earnings growth of 26% this year and 14% next year — and expects global equities to grind higher over the next six to twelve months.
What does the yield spike mean for bond investors?
UBS keeps its "attractive" rating on fixed income. In plain terms = higher starting yields lock in more coupon income for new buyers — that is actually a positive for income-focused investors.
Short-duration bonds — those maturing sooner — can reduce interest-rate risk effectively; UBS also sees tactical opportunities in longer-duration, high-quality bonds and investment-grade credit.
In Europe, the France–Germany 10-year spread widened 6 basis points to 110 bps, the widest since July 2012. This reflects concerns over France's fiscal deficit exceeding 5% of GDP and next year's presidential election — French yields now sit above those of BBB-rated Italian debt.
Gold is down 8% — is it still worth buying?
Gold fell below $4,300/oz, trading at roughly $4,280/oz, down more than 8% over the past month. Hawkish rate-hike expectations and a strong dollar are the immediate headwinds.
UBS is cautious short-term but constructive on a 12-month horizon. This means → more volatility is possible near term, but the medium-to-long-term thesis is intact.
Central-bank buying, reserve diversification, elevated government debt, and geopolitical uncertainty all underpin gold over the longer run. UBS views a pullback toward $4,000/oz as a buying opportunity and forecasts gold reaching $5,400/oz by around September 2027.
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