The Context: A Summary of Last Week
The past week served as a stark reminder of a major top-down paradox facing the global economy and markets – or what IMF Managing Director Kristalina Georgieva aptly framed as the mix of high anxiety and resilience. This is making the path forward for policymakers increasingly complex, and that is before we add the reality of US inflation stubbornly stuck above the Federal Reserve’s 2% target.
Adding to the general macro uncertainty, China-US trade tensions remained on a roller coaster. Early week warnings and concerns gave way to more reassuring remarks from President Trump over the weekend – this as the presidents of both countries prepare to meet in ten days’ time following other discussions (please see below).
The theme of policy uncertainty was also in play at the Federal Reserve as last week’s central bank data (the Federal government did not publish data due to the shutdown) illustrated the complicated operating environment for the Federal Reserve.
On one hand, Wednesday’s Beige Book noted that firms are inclined to reduce employment through attrition and firings. This aligns with recent remarks from Chair Powell and Governor Waller that point to the prospects of further rate cuts due to concerns about the employment side of the dual mandate. (The inclination to cut will be amplified by evidence of some credit stress and the desire to minimize the pressure on regional banks – also see below.)
On the other hand, the regional surveys also highlighted that both supply and demand factors, and not just the latter, are in play in the labor market. Moreover, inflationary pressures persist as input costs rise faster than before at a time when consumer prices continue to climb at a rate of around 3%.
This dilemma at the Fed amplifies the broader, policy-induced volatility already facing markets, driven by the much bigger role that tariffs, industrial policy, and national security concerns play in determining policy formulation and economic outcomes.
US equity markets recorded some new record highs, as did gold – both in volatile trading throughout the week. Yields on government bonds continued to come down with the 10-year dipping below 4% on a few occasions. Oil remained under pressure, as WTI fell below $60 to levels last seen five years ago.
Most financials led a strong first week of the full US corporate earnings season overall. The notable exceptions were two regional banks, Western Alliance and Zions, which said they had experienced fraud on their lending to certain funds. This followed JPMorgan’s CEO, Jamie Dimon, catching the markets’ attention by comparing the severe difficulties faced by two corporate credits (First Brand and Tricolor) to cockroaches, suggesting that more credit accidents were likely. This triggered a war of words with some in the private credit world.
Jamie Dimon was right in alerting us that we are likely to see other cases of excessive lending/inadequate due diligence in the massive stretch for yield by some investors. But remember, cockroaches are not termites that eat away at the foundations of houses: These cases are highly unlikely to pose a systemic risk to overall economic well-being.
Turning to emerging markets, the US administration issued a series of additional statements in support of Argentina and intervened with purchases of Argentine bonds and currency. The stabilizing impact on the currency eroded by the end of the week, triggering more supportive statements from US Treasury Secretary Scott Bessent.
Finally, last Friday evening, S&P lowered the sovereign credit rating of France to A+ from A–. Beyond putting more pressures on borrowing costs and denting the country’s economic standing, this surprise downgrade shakes confidence at the very core of a region in need of deeper structural reforms to boost productivity and growth. Moody’s rating review is expected to be announced this coming Friday.
This Week
The coming days will see another round of China-US trade talks, led by Vice Premier He Lifeng and Secretary Scott Bessent. They will follow President Trump’s latest statement which, in contrast to earlier remarks, noted that “we’re doing very well … we’re getting along with China.” Meanwhile, the Central Committee of the Chinese Communist Party will hold its “Fourth Plenum.” This four-day meeting is set to review the main parameters of the 15th five-year plan.
On the data front, the general absence of government data due to the shutdown will have one exception – this Friday’s CPI inflation which, needless to say, will attract lots of attention (including for its implication for Fed policy, starting with the October 28-29 FOMC decision). The consensus forecast is for a 0.3% monthly gain in the CPI to translate into an annual inflation rate of 3.1%.
Also look for the Kansas City and Philly Fed activity measures, as well as PMIs from S&P, UMich sentiment (activity and inflation), and the Bloomberg Economic Survey.
We also get the Eurozone’s debt data at a time when public finances in advanced countries are attracting a lot more attention (including the cover of this week’s Economist magazine). This will be supplemented by some individual country retail sales data, consumer confidence, and PPI.
It’s a big data week for the UK which also releases public finance numbers in the run-up to the end-November all-important budget announcements. We also get CPI and PPI inflation (with the former potentially hitting 4%), retail sales, PMIs and the CBI measures of activity and prices paid.
Elsewhere, look for:
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Argentina’s trade, government confidence index, and economic activity indicators, with the latter expected to point to a soft patch.
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Trade and inflation data from Brazil.
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China GDP growth, which is expected on the relatively softer side (4.7%) despite solid exports, together with industrial production, retail sales, and FDI numbers.
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PMI measures for India.
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Japanese inflation.
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Mexican inflation, retail sales and other activity measures.
Finally, on the central bank side,
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Look for comments from Bank of England Governor Andrew Bailey and ECB President Christine Lagarde, among others. These come as attention is focused on the potential for additional credit accidents, particularly in the US.
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The consensus forecasts expect interest rates to remain unchanged in China, Hungary, and Korea.
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The Turkish central bank is expected to cut rates by 100 basis points despite the surprise September pickup in inflation.
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The Swiss National Bank issues, for the first time, a summary of its policy discussions.
