Macroeconomics: The Day Ahead for 08 October

A heavily front loaded statistical schedule has Japan’s wages data (weak but nominal base salaries steady at 2.4%), monthly Tankan and services surveys, German Industrial Production (cratering on an -18.5% m/m drop in Auto output) and Swedish inflation to digest, along with an unexpectedly aggressive 50 bps rate cut from New Zealand’s RBNZ, and an unexpected rate hold in Thailand. The rest of the day’s schedule will find its focus in the minutes of the September FOMC minutes, various ECB, BoE and Fed speakers, and an expected unchanged policy rate decision in Poland. The backdrop remains one of quite stark contradictions as risk appetite remains relatively robust with US equities at highs, though fresh all-time highs for Gold implies a defensive posture, while the US federal government shutdown shows little sign of immediate resolution, leaving an increasing fog about the performance of the US economy, as if the Fed needed any further challenges in navigating policy.

Geopolitically, France is ploughing a deep furrow of political instability, with fresh parliamentary elections seemingly inevitable, and President Macron boxed into a very corner. It has to be observed that Macron has been the only French president in 30 years that has genuinely and very bravely attempted to implement long overdue and urgent reforms. It is not his failure that these have not been achieved, but the self-serving myopia of a deeply sclerotic and intellectually bankrupt array of political parties which refuse to acknowledge that painful reforms are a sine qua non – as they say ‘stupid is, as stupid does’.

Across the Channel, a UK government with a huge parliamentary majority stumbles from one crisis to another, seemingly unable to fashion any form of direction in policy terms and seemingly addicted to snatching defeat from any potential victory. The path to peace in Gaza is anything but assured, regardless of the US administration’s obvious determination. As one former government official observed at last week’s Energy Market Forum, whatever officials from any government directly or indirectly involved say or do, the populations of the countries in the Middle East region are outraged and disgusted by the death and destruction, and in many cases by the actions of their leaders. That deep-seated resentment will remain potential powder keg for future political and social unrest.

Seasoned observers of financial markets will note an increasing array of risks which could burst at any point in time, perhaps most significant are increasingly (over-)leveraged positions and buyouts, significant defaults in private credit and high yield credit (the SEC’s suggestion that private credit markets are not a ‘systemic risk’ looks to be a case of officialdom later being accused of myopia and being ‘asleep at the wheel’). There are also emerging tensions in repo markets, evident in a widening gap between SOFR and the effective Fed Funds Rate, and largely a function of ebbing US bank reserves as the Fed continues to shrink its balance sheet. The JPY’s slide in reaction to the election of Takaichi (a mentee of former BoJ governor Abe) as LDP leader is well founded, given her clear resistance to further BoJ policy tightening, even though an end of month rate hike remains a strong prospect, and the weakness of the JPY strengthens the case for a rate hike. All of this comes amid mounting fiscal woes across the developed world, which continues to steepen yield curves, even if 10-yr US Treasury yields are well below start of year levels, though elsewhere most are higher year to date (above all Eurozone, UK and Japan), even if generally only modestly.