Credit pressures drive sharp repricing of monetary policy factor

Last week, US Core PCE came in below expectations, while Euro Area core HICP printed close to consensus. US Manufacturing ISM was unchanged in September, while US labour market data was weaker than consensus. Our US economics team pushed their next and last expected Fed hike to December and still expect 3 cuts until Q1 2028. Our RAI PC2 "Monetary policy" factor fell to -8 last week, the third-lowest level since 2000 (after 2020 and 2022), as the downward pressure broadened from rates to credit. The rates component of the RAI has priced stronger nominal growth since the summer (which weigh on RAI PC2), but widening spreads over the past two weeks have pushed the credit component sharply lower, weighing further on both PC2 and the headline RAI. The widening was sharpest in Euro Area sovereign spreads, particularly France, but was broad across corporate and EM credit. As a result, RAI Credit recorded one of its sharpest weekly declines since 2000. The other RAI components—equity, volatili