The Context
A sharp policy-induced selloff on Friday wiped out what had been a solid week for stocks. Oil slumped, government bond yields fell, and the dollar weakened as President Trump announced he was ready to impose “massive tariffs” on China (a threat that was followed by the specification after most markets closed of a 100% tariff to be implemented by early November, if not before).
The situation was not helped by a second piece of news last Friday that challenged another broadly-held view in markets and among economists: the ability to “look through” the US government shutdown. Instead, the Administration signaled the start of the threatened firing of some federal workers.
The US was not the only source of policy-induced volatility. It was also present in France, where the resignation of the prime minister shook the bond market. In Japan, the apparent lack of political support for the new prime minister raised doubts about the country’s ability to implement its economic agenda, weakening the currency.
Meanwhile, European data releases continued to point to persistent economic malaise, with Germany’s industrial production in particular declining by the most since 2022.
On the central bank front, the release of the minutes of the last Federal Reserve policy meeting suggested significantly more disagreement among members—relating to both the assessment of the economic outlook and its policy implications—than was signaled at the press conference that followed the meeting.
New Zealand’s central bank cut rates by 50 basis points, above the consensus forecast of 25 bps. Thailand surprised the other way, keeping rates unchanged.
The major focus in emerging markets was on US backing for Argentina aimed at calming the currency and bond markets ahead of this month’s election. A retracement in the beneficial impact of last week’s first round of intervention led to a series of supportive statements by US Treasury Secretary Bessent and a US purchase of Argentine pesos—all this as the terms of a $20 billion swap were being finalized.
Crypto had a tough time last week with drops of 17% for Bitcoin and 27% for Ethereum, as gold prices ended slightly higher. Other market notables included a short squeeze in silver, more stress on the US leveraged loan segment, and growing talk of an AI bubble (more to follow on this in the coming week, including the notion of a “rational bubble”).
The Weekly Look Ahead
“Geo-economics” will remain a major theme this week as geopolitics and domestic politics continue to influence economic policy and outcomes in a major way.
In the US, the dual focus will be on the evolution of the trade tensions with China and the government shutdown. In France and Japan, it is all about the ability of the newly appointed prime ministers (re-appointed in the case of Lecornu in Paris) to mobilize the needed support. And in Argentina, it’s about the extent to which markets’ are willing to test US support for the Milei government in the run-up to the elections there—this as repeated currency intervention is said to have depleted quite a bit of the country’s foreign exchange reserves.
With the government shutdown interrupting most US data releases, and with the scheduled CPI release now delayed to October 24th, the focus will remain on private sector and Fed data. Look in particular for the NFIB measure of small business sentiment, the Philly Fed business outlook, and housing data.
UK data will shed light on two aspects of economic consideration—inflation with the latest average household earnings numbers, and economic activity with the monthly GDP, industrial production, and services.
In Germany, look for the ZEW survey data which will shed light on both current conditions and expectations. Also look for the Eurozone economic survey.
China releases its trade data, shedding light on the impact of US tariffs (including on trade diversion), as well as foreign direct investment and wholesale prices.
