The Fed pointed to strong growth, resilient domestic spending, robust investment and a broadly stable unemployment rate, giving it room to keep fighting inflation. Energy inflation remains the immediate concern: Warsh warned that rising energy and related prices must be prevented from spreading across the economy. As such, December remains live, without a commitment.

In summary, the Fed delivered breathing space, with little reassurance that borrowing costs have peaked. Fed funds futures imply around an 80% chance of a 25bp hike in December.

But the US 2-year yield eased after the meeting to around 4.70%, while the 2–10-year spread widened above 30bp as longer-term yields rose. Equity markets took the rather hawkish announcement in their stride: major US indices edged higher, with the technology-heavy Nasdaq 100 leading gains.

Alas, Nasdaq futures are leading losses this morning as the earnings announcements from Microsoft and Google came in mixed.

Both companies’ cloud businesses performed strongly: Microsoft’s Azure revenue grew 48%, while Google Cloud revenue grew 103% in the September quarter compared with the same time last year —above expectations. Yet Microsoft gained around 3% in after-hours trading, while Google fell more than 10%. That’s because investors remained focused on spending and free cash flow!

Both companies more than doubled their cash capital expenditure year-on-year, but Google’s free cash flow — which had turned negative last quarter due to massive AI spending — deteriorated further to negative $9.1bn, a bigger-than-expected shortfall. Microsoft’s free cash flow also fell by around 27%, yet remained positive at $18.6bn. Not helping: Google’s advertising revenue missed expectations by around $2bn, raising concerns that the AI payoff is falling short of what investors wanted, given the amounts being spent on it!

How interesting: this time last year, Google started to diverge positively from Microsoft. The excitement around its Gemini model and TPUs charmed investors, who started betting that Google was THE ultimate AI play.

Today, Microsoft is closing the gap thanks to stronger-than-expected cash generation and strong Azure growth — although part of its spending undershoot reflected delayed data-centre deliveries. A reminder that leadership in the AI race depends not only on having the most exciting technology, but also on turning that technology into profitable growth without overwhelming the balance sheet.

Elsewhere, Samsung’s quarterly revenue more than doubled, while operating profit surged nearly ninefold, driven by booming AI chip demand. Yet shares are down around 4% as its outlook appears less bullish than SK Hynix’s, investors must wait until January for its next shareholder-return policy, and higher component costs squeezed the mobile business. Another reminder that record earnings alone aren’t enough when expectations are already sky-high.

Amazon is due to announce its results next, after the US closing bell.

ECB decides

The European Central Bank (ECB) is widely expected to leave interest rates unchanged, but here as well, a pause this week doesn’t mean that another hike before year-end is off the table: inflation remains uncomfortably above the 2% policy target, energy prices remain elevated, and the ECB will want to keep its options open.

The thing is that bond markets have already done some of the tightening for the ECB, as fiscal and political tensions in France have fed through financial markets in the form of a bond selloff and higher yields. And higher sovereign yields increase borrowing costs across economies, putting pressure on businesses, households and governments without the ECB having to lift a finger.

So the question is: how much additional tightening is really needed?

The answer will depend on how persistent the rise in borrowing costs proves to be, and whether higher energy prices spread into broader inflation. As such, waiting at least until the dust in the French streets settles looks like a reasonable option. If, despite tighter financial conditions, higher energy costs feed into wages and services prices, the ECB could still hike later this year or next year. If, however, tighter financial conditions squeeze activity and contain that inflation pass-through, the need for further action would diminish. Voilà!

Beyond the rate decision, ECB President Christine Lagarde’s post-decision presser will be more closely watched than usual, as everyone wants to know if, how and when the ECB could step in if bond stress escalates further. Because there is a difference between accepting higher yields as part of the fight against inflation and tolerating disorderly selling that threatens financial stability and the transmission of monetary policy. In this respect, France’s 10-year yield spread over German Bunds has reached levels last seen during the euro sovereign debt crisis — also pushing broader euro area bond spreads over German Bunds higher and raising questions about potential contagion.

But here, the language matters. If Lagarde highlights concerns about contagion, investors could be reassured about the ECB’s willingness to step in. But if she chooses to describe the selloff as a reflection of fiscal problems — which is the sad truth — she would be putting the ball back in the court of governments, which are stuck between their financial constraints and political discontent.

So today’s post-ECB decision bond action could help determine the next direction for broader equity markets and the euro.

But the worst outcome today would not be higher yields alone, but a further widening of sovereign spreads. If investors conclude that the ECB will keep policy restrictive while offering little reassurance against escalating bond stress, the combination could weigh on equities and strengthen the euro bears’ case for a move towards 1.10 against the US dollar.