US Economy Grows 3.4% in Q3 as Inflation Rises, ECB Holds Rates While Lagarde Announces Early Exit

The U.S. economy expanded at a 3.4% annualized rate in the third quarter of 2026, beating the 3.2% consensus estimate and accelerating sharply from the 2.2% pace recorded in the second quarter, the Commerce Department reported Thursday. Personal consumption rose 3.8%, well above the 3.4% forecast and matching the prior quarter, with AI investment and consumer spending cited as primary drivers. The GDP price index came in at just 2.2%, far below the 3.2% estimate and down from 6.1% previously, though that measure of broad price pressure diverged from the monthly inflation gauges.

September PCE inflation told a stickier story. The headline PCE price index rose 0.5% month-over-month and 3.6% year-over-year, matching expectations but accelerating from 0.3% and 3.4% respectively in August, marking the hottest monthly print since March 2026. Core PCE climbed 3.1% year-over-year, up from 3.0%, also in line with estimates. Real disposable personal income fell 0.3% in September while real personal spending was flat, meaning inflation is outpacing income growth. The personal saving rate slipped to 3.8%, its lowest since October 2022. Initial jobless claims for the week ending October 24 came in at 194,000, below the 198,000 forecast and the lowest reading since mid-July. Markets moved to price in roughly an 83% chance of a Federal Reserve rate hike in December, with Bank of America calling for hikes in both December 2026 and March 2027.

In Europe, the European Central Bank held all three key rates unchanged at its October meeting, keeping the deposit facility rate at 2.50%, the main refinancing rate at 2.65%, and the marginal lending facility at 2.90%. The ECB warned that rising energy prices pose upside risks to inflation and downside risks to growth, adding that an extended energy shock is likely to drive inflation higher. Underlying inflation has remained broadly stable and wages have not shown a material response so far, the bank said, reiterating a data-dependent, meeting-by-meeting approach. The euro fell 0.4% to $1.1105 after the decision, its weakest level since May 2025.

Hours before the rate decision, ECB President Christine Lagarde announced she will resign on February 7, 2027, approximately nine months before her eight-year term was due to expire in October 2027. Her departure sets off a succession contest at a particularly fraught moment, with France's bond market under pressure, the French-German 10-year yield spread near 155 basis points, and energy-driven inflation threatening the eurozone outlook. Spain's Pablo Hernandez de Cos and the Netherlands' Klaas Knot are leading candidates to succeed her.

U.S. equities opened lower on Thursday, weighed by a sharp drop in Alphabet after the company's results disappointed investors and revived concerns about whether surging AI capital expenditure is generating adequate returns.