What to watch in the week ahead

• Higher-than-expected US inflation and strong employment data have reinforced expectations of a Federal Reserve rate increase. With markets already braced for a hike, attention will likely focus on the economic projections and the tone of the Fed chair’s comments. We believe resilient growth and robust earnings should enable equities to withstand moderately higher rates.
• The European Central Bank raised rates last week and signaled greater concern about persistent inflation. Decisions from the Bank of England and Bank of Japan will test how higher energy costs are affecting policy across major economies. We expect rates to remain unchanged in the UK through year-end, while Japan continues a gradual tightening cycle.
• Strong cloud results from Oracle reinforced evidence that demand for AI computing capacity remains robust. But leading AI executives have also called for greater attention to safety and oversight. Investors will assess whether this debate could slow model development or redirect spending toward safeguards. We retain conviction in the broader AI growth story and favor diversified exposure across the value chain.

Will the Fed signal more hikes to come?

Markets have become increasingly convinced that Federal Reserve tightening is on the way. US core consumer prices rose 0.3% month over month in August, above the 0.2% consensus forecast. Combined with the strong August employment report, the release reinforced expectations that the Fed will raise rates at the conclusion of this week’s meeting. Markets ended the week pricing roughly a 90% probability of a 25-basis-point hike in September, and the S&P 500 rose 0.9% on Friday.

With markets already braced for an increase, the main focus looks likely to be on the tone of the Fed chair’s comments, alongside the updated economic projections and projected path for interest rates. Investors will assess whether policymakers present the move as the beginning of a more persistent tightening phase or preserve scope for patience after September. Changes to the inflation and growth forecasts could also help show how officials are weighing uneven disinflation against continued economic strength. US retail sales, released earlier on Wednesday, will offer guidance on whether consumer demand remains strong enough to absorb higher borrowing costs.

Our base case is for the Fed to raise rates by 25 basis points this week and again in December. However, we expect the economic effect of this additional tightening to remain modest. The Fed’s model suggests that 50 basis points of rate increases would reduce growth by only a few tenths of a percentage point, while strong employment, expanding factory activity, and AI-related investment continue to support revenues and earnings. We remain Attractive on global equities and recommend broad exposure across sectors and regions, while reducing excessive dependence on individual stocks.

Will other central banks follow the ECB’s hawkish lead?

The European Central Bank struck a hawkish tone as it raised rates last week, with its president describing the unanimous decision as a “no-brainer.” The deposit rate was raised by 25 basis points to 2.5%, while updated projections showed inflation remaining above the ECB’s 2% target throughout the forecast horizon. Core inflation is projected to rise from 2.5% in 2026 to 2.6% in 2027 before easing to 2.3% in 2028. The ECB’s message reflected both greater-than-expected economic resilience and renewed pressure from energy prices. Brent crude ended the week about 8% higher, after attacks prompted Saudi Arabia to shut its East-West oil pipeline as a precaution after recent attacks.

The Bank of England and Bank of Japan now face policy tests of their own. UK labor market data arrive on Tuesday and inflation figures on Wednesday, the day before the next Bank of England decision. Investors will assess whether higher energy costs are broadening into wages and services prices, or whether softer areas of employment and growth allow policymakers to remain patient. Japanese trade data arrive on Wednesday, followed by inflation figures and the Bank of Japan meeting on Friday. Attention will focus on the pace of further policy normalization and whether underlying inflation provides sufficient support for another step toward higher rates.

Our base case is for the Bank of England to keep its policy rate at 3.75% through December, before lowering it to 3.50% in March 2027 and 3.25% in June. We expect the Bank of Japan to move in the opposite direction, raising its policy rate from 1% currently to 1.25% by December and 1.75% by June 2027. The ECB is also likely to raise its deposit rate once more, in our view, before pausing. While higher energy costs support restrictive policy, limited evidence of entrenched second-round effects argues against a rapid synchronized hiking cycle. We continue to favor quality bonds: Higher yields are now creating increasingly attractive entry points further out the curve. Medium- to longer-dated high-quality bonds could offer both attractive income and diversification benefits if tighter policy ultimately slows growth or reinforces confidence in the inflation outlook. Meanwhile, broad commodity exposure can help diversify portfolios against further inflation or supply disruption.

Can the AI investment cycle withstand calls for restraint?

Recent cloud results provided striking evidence that demand for AI computing capacity remains robust. Oracle reported more than USD 30 billion of additional AI cloud contracts in its fiscal first quarter, lifting its revenue backlog to USD 664 billion, while cloud infrastructure revenue rose 121%. The resulting optimism was tempered over the weekend, however, when several prominent AI executives also publicly acknowledged that oversight may need more time to catch up with model development. The debate contributed to weakness in AI-linked stocks in Asia on Monday, with the Kospi falling 3.3% and semiconductor shares leading the decline—despite a skeptical response to the calls from President Trump.

Investors will closely follow whether the debate changes the pace or composition of AI investment. A broad voluntary slowdown appears difficult while competition between companies and countries remains intense. Even so, greater spending on safety, monitoring, and governance could redirect some investment without reducing its overall scale. Meanwhile, economic data from around the world this week will provide a test of whether AI-led investment strength is part of broader economic resilience. Chinese industrial production and retail sales are due on Tuesday, US retail sales on Wednesday, and US housing starts and building permits on Thursday.

Our base case is that AI investment will remain robust and continue to support economic growth and corporate earnings. We project global AI-related capital expenditure to rise from around USD 900 billion in 2026 to USD 1.2 trillion in 2027. Rapid growth in AI usage and cloud revenue provides encouraging evidence on demand and monetization. Investors should retain selective and diversified exposure to AI, including semiconductors and cloud computing, while also considering more defensive technology segments. More broadly, robust investment and earnings growth support our Attractive view on equities and our expectation that market participation can broaden beyond a narrow group of technology leaders.