Written Commentary
The Ghost in the Machine: Q3 2026 Macro Outlook
September 28, 2026
Digesting Eurozone, Japan and South Korea CPI ahead of US labour market report, as the US sending a further aircraft carrier and additional troops to the Middle East serves as reminder that escalation risks remain; busy run of ECB and Fed speakers; FX and bond volatility a threat to risk appetite.
Eurozone CPI: further sharp rise almost wholly due to energy prices, as already flagged by national readings, core CPI still contained; ECB Rehn comments on high bond yields perhaps restraining pass through effects of note.
Japan: Tokyo CPI surge mostly due to phase out of water and child education subsidies, though some pass through from wholesale to consumer prices evident; significant Kiuchi shift away from rate hike resistance.
U.S.A.: labour data clearly not top of Fed policy agenda, solid payrolls gain, steady unemployment rate seen; upside miss likely to have greater impact, BUT hefty Treasury market short position does pose squeeze risk.
EVENTS PREVIEW
Eurozone, Japan and South Korean CPI data accompany the US monthly labour market report to top the end of week agenda, as news that the US is sending a third aircraft carrier and 10,000 additional troops to the Middle East serves as a reminder that escalation risks in the conflict with Iran remain, even as rising shipments of crude and LNG offer the prospect of some relief for energy prices. As noted yesterday both Fed and ECB officials are pushing back on the idea of back to back rate hikes, while maintaining a clear tightening policy stance, and underlining the high degree of uncertainty on the overall economic and policy outlook.
While VIX stock index volatility remains very subdued, both US Treasury and above all FX volatility have spiked higher, with FX options markets pricing in a relatively high risk of a volatile reaction to today’s US Payrolls, which would likely spill over into other risk assets. As the old adage goes, carry trades into riskier assets work until FX volatility blows a hole below the waterline.
Otherwise the comments from Japan Economy Minister Kiuchi signalling less resistance to BoJ policy tightening were significant, given he has traditionally been a robust opponent of rate hikes, in contrast to Finance Minister Katayama. While Tokyo CPI surged much more than expected, the bulk of the rise was due to base effects as child education and water subsidies are phased out, though there was evidence of pass through effects from high input prices.
Eurozone CPI: Energy Drives Headline Inflation Higher
National CPIs all spiked higher on the back of higher energy prices, predicating expectations of a 0.5% m/m jump in headline CPI to push the y/y rate sharply higher to 3.7% from 3.2%, but core CPI is only seen edging up 0.1 ppt to 2.5% y/y, per se reinforcing the ECB’s view that spillover effects continue to be very limited.
This morning’s comments from ECB’s Rehn noting that the sharp rise in Eurozone bond yields may help to contain second round effects only underline that perspective. The primary risk at the moment is more about how long governments with already very strained fiscal positions can continue to fund subsidies and fuel tax cuts to cushion the energy price blow to consumers and businesses, which according to a UN study could see total subsidies reaching as high as $1.0 Trln in 2026.
US Payrolls: Focus Remains on Labour Market Resilience
For the time being, the labour market pillar of Fed policy has been very much subordinated to the inflation pillar, and indeed the growth outlook, with Warsh also putting greater emphasis on the Household survey that generates the Unemployment Rate than the Payrolls Establishment survey.
Payrolls are expected to moderate to a still robust 90K after a blowout rebound of 162K and a net 2-month upward revision to June and July of 55K, serving as a reminder not to trust the July labour report. The Unemployment Rate is seen holding steady at 4.1%, which the Fed views as indicative of full employment, while Average Hourly Earnings are also seen posting an unchanged 0.3% m/m 3.1% y/y increase.
If close to expectations, this would confirm a ‘low hire, low layoff’ economy, and market sensitivity to outlier outcomes looks to be much greater for higher rather than lower expected outturns, though the hefty short position in US Treasuries cannot be ignored.
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