Daily Briefing | October 1, 2026: Policy Divergence between China, Europe, and the United States and the Reassessment of Energy Interest Rates

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Today's main theme

In the past 24 hours, global markets have entered a new phase of "the same energy shock, different policy responses". US PCE inflation in August was lower than expected, significantly reducing the probability of an October rate hike, but economic growth and AI investment are still pushing up long-term yields. Inflation in major European economies has risen across the board due to energy price increases triggered by the Iran war, leading the market to bet that the European Central Bank will need to raise interest rates four more times in the next year. China, on the other hand, has intensified structural easing, lowering mortgage supplementary loan rates, expanding relending for technology and micro and small enterprises, and implementing government interest subsidies for first-time homebuyer commercial loans nationwide for the first time starting October 1. In terms of technology, Google announced its flagship Gemini 4 model, Argon, after a delay of several months, with computing power, cost, and security evaluations becoming the core of the competition. Meanwhile, the US and Iran continued to exchange a seven-day mutual trust plan through Qatar, and the dispute has shifted from the composition of the plan to the order of action. Interest rates, energy, AI capital expenditures, and geopolitical negotiations are collectively determining risk pricing in the fourth quarter.

Five key news items

1. US PCE fell short of expectations, reducing the probability of an October rate hike to approximately 37%.

The U.S. Commerce Department reported that the personal consumption expenditures price index rose 3.4% year-over-year in August, lower than the 3.7% expected in a Reuters poll. The final GDP forecast for the second quarter was revised upward to an annualized rate of 2.2%, supported by consumer spending and AI infrastructure investment. The data portfolio shows that inflation remains significantly high, but not as intense as previously feared, while growth remains resilient. The market's probability of the Federal Reserve raising interest rates by at least 25 basis points in October has dropped from about 51% the previous trading day and nearly 71% a week ago to about 37%. Two-year U.S. Treasury yields initially fell before rebounding, while long-term yields remain driven by expectations of growth, oil prices, and fiscal supply. The Nasdaq rose 0.24% and the S&P 500 fell 0.25%, but both recorded gains for the second consecutive quarter. The Dow Jones Industrial Average fell 0.86%. The next key focus will be on non-farm payrolls, the impact of adjustments to PCE statistical methods, and whether high oil prices will be transmitted back to core inflation. If short-term interest rate cut expectations improve while long-term yields remain unchanged, financial constraints on housing, corporate credit, and overvalued stocks will not be significantly eased. Corporate bond refinancing spreads and bank credit standards will show the cumulative impact of high interest rates earlier than stock indices.Source: Reuters

2. Energy inflation in Europe is heating up across the board, with markets betting on four more interest rate hikes in the next year.

The war in Iran pushed up natural gas, gasoline, and diesel prices, and inflation in major Eurozone economies generally exceeded expectations in September. France's harmonized inflation rate rose to 3.4% from 2.6% in August, Italy's from 3.2% to 4.1%, Germany's from 2.9% to 3.3%, and Spain's from 4.6% to 5.0%. Core inflation, excluding energy and food, remained at 2.4% for the third consecutive month. Economists expect overall inflation in the Eurozone to rise from 3.2% to 3.6%, with a peak potentially close to 4%, higher than the ECB's previous path. The European Central Bank has already raised interest rates twice this summer, and the market is currently anticipating four more rate hikes in the coming year. A strong dollar will also amplify the cost of importing energy denominated in dollars. As a widespread wage-price secondary effect has not yet emerged, policy is likely to remain gradual, but winter energy demand and the situation in the Middle East have pushed the risks significantly higher. Next, we should observe Friday's Eurozone headline inflation, wage negotiations, corporate price hikes, and whether a weaker euro will force the central bank to act faster. European bonds, banks and highly leveraged companies will be the first to reflect the policy revaluation. Differences in fiscal space among member states could also widen government bond spreads, making it more difficult for the ECB to balance controlling inflation with maintaining financial stability.Source: Reuters

3. China lowers PSL interest rates and launches nationwide interest subsidies for first-time home loans.

The People's Bank of China lowered the one-year mortgage supplementary loan interest rate by 25 basis points, from 1.75% to 1.5%, and included water networks, new power grids, computing power networks, next-generation communication networks, urban underground pipeline networks, and logistics networks in its support scope. The relending quota for scientific and technological innovation and transformation has been increased by 200 billion yuan to 1.4 trillion yuan, and the support ratio has been raised from 60% to 100%. The amount of relending and rediscounting to support agriculture and small businesses will increase by 500 billion yuan to 4.85 trillion yuan, of which relending to private enterprises will increase by 300 billion yuan to 1.3 trillion yuan. Meanwhile, starting from October 1, eligible newly issued first-time homebuyer commercial loans nationwide can receive an annualized interest subsidy of 1 percentage point, for a maximum of five years, with a maximum loan support of 1 million yuan per household; The housing must not exceed 120 square meters and the total price must not exceed 1.5 million yuan, and the trial period will be one year. The policy attempts to simultaneously stimulate infrastructure, technology investment, and housing demand, but the price cap means that the beneficiaries are more concentrated in third- and fourth-tier cities. Going forward, it depends on whether policy bank injections, local government support, residents' willingness to buy homes, as well as capital outflows and bank interest rate spread constraints limit broader interest rate cuts.Source: People's Bank of China Policy Release；Mortgage interest subsidy policy

4. Google released its flagship Gemini 4 model, Argon, but the public release date remains undetermined.

Google unveiled Argon, the flagship model of the Gemini 4 series, stating that it is larger than the previous Pro series, designed for complex workloads, and can compete with OpenAI Astra and Anthropic Opus on several programming and cybersecurity benchmarks. Google's self-reported results show that Argon leads two competitors in some metrics, but still lags behind in two of the four programming tests disclosed by the company. The model will initially be provided to a small number of cybersecurity partners and will participate in the U.S. government's pre-release model access mechanism. A public release date has not yet been given. Google also confirmed that it has abandoned the Gemini 3.5 Pro, which was originally scheduled to be launched in June; Previously, DeepMind underwent a restructuring, founder and head Demis Hassabis left, and several Gemini leaders have also left. Months of delays have allowed competitors to widen their lead, and Google has recently shifted its promotional focus from absolute capability to cost advantage. The significance of Argon lies in the fact that the competition for cutting-edge models is shifting from a single list to security validation, unit inference costs, and enterprise deployment. Going forward, we should observe third-party evaluations, pricing, cloud customer adoption rates, and the pace of public releases. If security partners take the lead in verifying their cyber defense capabilities, Google can leverage its cloud platform and search distribution to shorten the lag time. Conversely, continued delays will weaken corporate procurement confidence.Source: Reuters

5. The US and Iran continued to exchange seven-day confidence-building plans, shifting differences to the order of action.

Iranian Foreign Minister Araghzi has received feedback from the United States on the seven-day confidence-building plan through Qatari mediators and is preparing to discuss it in Tehran. Iran proposed last week to reopen the Strait of Hormuz and resume normal maritime passage once necessary conditions are met; Trump subsequently publicly rejected the earlier version, but Qatar continued to pass messages between Washington and Tehran. The documents currently circulating attempt to bring both sides back to an enhanced version of the June memorandum of understanding, which includes steps related to Iran's nuclear program, passage through the strait, and a ceasefire. Sources familiar with the matter say the core disagreement is no longer what the plan will include, but rather who will take action first and how to verify and synchronize it. This change means there is still room for diplomacy, but it also exposes a trust gap between the lifting of sanctions, port blockades, and the resumption of navigation. Hormuz undertakes important global energy transportation, and once an executable sequence is established, oil prices, shipping costs, and European inflation expectations may all fall. If negotiations break down again, the winter energy risk premium will continue to rise. The next step depends on Iran's formal response, third-party monitoring mechanisms, and whether the experience of the brief ceasefire in June can be institutionalized.Source: Reuters

Market Correlation and Today's Observation

The core contradiction at the start of the fourth quarter was the divergence between short-term policy expectations and long-term capital costs. Lower-than-expected US inflation has lowered the probability of an October rate hike, which may ease the pressure on the short-term interest rate differential between the US dollar. However, upward GDP revisions, AI infrastructure investment, and energy costs still support long-term returns, so overvalued technology stocks may not necessarily see a comprehensive valuation expansion. Europe faces a more direct shock from imported energy. If expectations for an ECB interest rate hike continue to rise, the euro may receive policy support, but corporate profits, real estate and sovereign debt financing costs will be under pressure. The US-Iran negotiations are the most important tail variable across markets: the resumption of navigation in the Strait will simultaneously lower crude oil, European inflation, and long-term debt premiums, while a slowdown in negotiations will strengthen the opposite chain.

China's policy direction contrasts with that of Europe and the United States. PSL interest rate cuts, relending expansion, and mortgage interest subsidies will help stabilize infrastructure investment, computing power investment, real estate sales, and RMB risk appetite, but the effectiveness of the policies depends on the actual injection by banks and whether residents are willing to increase leverage. Commodity markets should pay attention to whether demand for copper, steel, and energy can improve due to the "six networks" project; The technology sector needs to distinguish between product competition brought about by model releases and financing pressure caused by data center capital expenditures. Today, we should focus on tracking the US and European bond yield curves, the US dollar versus the euro, oil prices' reaction to news of the negotiations, the offshore yuan during the Chinese holidays, and whether the Argon third-party review can verify Google's cost and performance claims. If oil prices fall while European yields continue to rise, it indicates that market concerns have shifted from a one-off energy shock to wages and core prices. Only if US long-term Treasury yields also decline simultaneously can risky assets experience a broader recovery. For Chinese assets, the first test points after the holiday will be mortgage applications, real estate transactions, and the launch of policy bank projects, rather than the policy quotas themselves.

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Cover image:Val Vesa / Unsplash