US equities are lower and the Nasdaq is down more than 1%, as Alphabet's sales miss revived doubts over AI spending. US Q3 GDP beat expectations. The ECB held rates. Lagarde will step down early

US equities extended the soft tone from Asian trading, as disappointing results from large technology companies revived doubts over whether heavy AI spending will deliver sufficient returns. The S&P is modestly lower, while the Nasdaq is down more than 1%, led by a sharp fall in Alphabet after sales missed expectations. Treasuries were little changed and G10 currencies mixed against the US dollar. Oil held steady despite reports of fresh diplomatic efforts to resolve the Middle East conflict.

The US economy grew at its fastest pace in a year in Q3, supported by business investment and resilient consumer spending. GDP rose an annualised 3.4%, marginally above expectations. September data were softer, with real personal spending flat and personal income up 0.2%, both below consensus. The core PCE deflator - the Fed's preferred inflation gauge - rose 0.3% m/m in line with expectations, lifting the annual rate to 3.1%.

The data did little to shift Fed pricing, which continues to imply around an 80% chance of a December hike. Treasuries were broadly flat, with the 10-year yield near 5.00%, supported at the margin by softer US equities.

The ECB left rates unchanged at 2.5% and struck a dovish tone despite the recent surge in commodity prices. Although a hike was discussed, President Lagarde played down the risk of inflation spreading beyond energy, citing a lack of evidence that higher energy prices are feeding into excessive wage demands or a material lift in inflation expectations. The ECB reiterated its data-dependent, meeting-by-meeting approach, leaving the door open to another hike in December, with markets still pricing around an 80% chance. German yields closed lower, led by the front end, while the euro recovered from an initial post-meeting dip.

Just ahead of the decision, it was announced that Lagarde will step down in February, nine months before the end of her term. Asked about recent turmoil in European bond markets, she said the ECB had "instruments available to respond" but warned that heavily indebted countries "have to factor into their fiscal policy plans the fact that interest rates are higher and will probably remain higher for a period of time".

G10 currencies saw limited net moves, with the euro and pound marginally firmer against the US dollar. The NZD dipped towards 0.5610 during offshore trading before recovering to around 0.5630. On the crosses, NZD/AUD has edged steadily higher and is back above 0.8000.

NZ rates closed lower across the curve yesterday, reflecting some follow-through after the RBNZ Policy Review and a constructive tone in offshore rates markets due to the softer backdrop for risk-sensitive assets. Pricing for the December MPS was little changed, implying close to a 90% chance of a 25bp hike. 2-year swap closed 5bp lower at 3.96%, testing the post-RBNZ low, while 10-year swap fell 6bp to 4.58%.

The government curve matched the move in swaps, with 10-year bonds 6bp lower at 4.87%. Demand at the weekly tender was strong, with solid coverage and both lines clearing below pre-tender mids. The result follows NZ Debt Management's announcement yesterday that weekly tender volumes will be cut from NZ$450m to NZ$350m from next month.

Consumer confidence is the only domestic release today. Tokyo CPI is released ahead of the Bank of Japan policy decision, where rates are expected to be left on hold at 1.25%. The focus will be on any signals on the timing of the next hike, with the market pricing about a 50% chance of a 25bp move by December. In the US, the Q3 employment cost index is released alongside the Chicago PMI.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.