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Investing.com - Analysts at HSBC have predicted that the Federal Reserve will opt to cut interest rates once again at its meeting in December, before keeping borrowing costs on hold over the next two years.
In a note, strategists at the bank flagged that while there are "pockets of inflationary pressure" in the U.S., slower rental price growth "may help counteract to a degree in the coming months."
The comments come as investors are awaiting the release of key U.S. economic readings that were delayed by a record-long government shutdown.
Nonfarm payrolls data for September is due on Thursday, and will be watched for more insight into the labor market, which is a key consideration for the Federal Reserve.
Fed Governor Christopher Waller said on Monday that the central bank should cut interest rates to prevent further deterioration in the sector. But bets that the Fed will cut rates in December have waned.
The delay of several key labor and inflation readings will see the Fed flying mostly blind into the meeting next month, potentially making a hold more likely as the policymakers await concrete evidence to base their decisions on.
Fed Chair Jerome Powell has previously suggested that a rate reduction in December, which would follow two 25-basis point cuts in September and October, was "not a foregone conclusion."
Markets are pricing in just over a 40% chance for a 25 basis point cut during the Fed’s December 10-11 meeting, down from 55.4% last week, CME’s closely-monitored FedWatch Tool showed.
AI bubble narrative
Meanwhile, the HSBC analysts said they are maintaining a "risk-on" attitude, staying "most overweight" in U.S. and emerging market equities.
"The main risk to our view is higher U.S. rates, but this is unlikely to be a topic for the next 3-6 months," the analysts wrote.
They added that they "disagree" with an intensifying fears around a so-called artificial intelligence "bubble," underpinned by concerns over debt-fueled capital expenditures and frothy valuations in AI-exposed stocks.
These worries contributed to a steep selloff in equities on Monday which brought the main averages on Wall Street below their 50-day moving averages -- a key level used to assess the path forward for the market.
Still, much of the AI spending has come from "deep-pocketed incumbents, not leveraged start-ups," the HSBC strategists argued, saying they "disagree with the AI bubble narrative."
Against this backdrop, the analysts said they see "the greatest room for valuation expansion in emerging markets," while Indian stocks could be "a diversifier to crowded AI holdings."