The Context
The most striking feature of the past week was the market’s sangfroid response to the US federal government shutdown. Far from worrying, stock markets shrugged off the political blame game, setting new record highs, while government bond yields edged lower.
Gold prices moved to yet new fresh record levels, and Bitcoin, the other component of what J.P. Morgan analysts have termed the “debasement trade,” continued to trade near its all-time high. The Dollar Index (DXY) remained stubbornly below 98, confirming its status as the only major asset not to have staged a substantial recovery from its April lows.
Meanwhile, the shutdown immediately deprived economists and policymakers of the widely-watched monthly jobs report. Available data, including the latest ISM surveys, pointed to economic activity that is softening somewhat (service sector deceleration, manufacturing in contraction, and lower confidence — all contrary to the robust Atlanta Fed concurrent GDP measure) but improving inflation indicators. The latter was not replicated elsewhere: food inflation in the UK continued its unwelcome rise, and Turkey’s headline inflation came in higher than expected. Separately, in emerging markets, traders were seen testing the robustness of US support for Argentina, forcing the IMF to issue supportive, though non-committal, remarks.
This Week
The week ahead will be shaped by US political maneuvering, the resulting data vacuum, lots of numbers elsewhere, and central bank insights.
Needless to say, attention will remain fixed on Washington’s government funding impasse. The longer the shutdown persists, the greater the drag on economic output and the more acute the “data void.” (For details, please see the note drafted posted yesterday on the four major effects of the shutdown.)
Key weekly reports—including jobless claims, trade balances, and budgetary data—are now subject to major question marks. Lacking hard figures from the Federal government, analysts will place an even heavier-than-usual weight on other, such as the New York Fed’s inflationary expectations measures , for clues on the economy.
The economic calendar includes two releases that are key to understanding future interest rate trajectories:
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The FOMC minutes will provide some insight into the depth and universality of convictions among Federal Reserve members regarding future interest rate cuts. Traders will scrutinize the text for any hint of dissension or caution regarding the optimistic “soft landing” scenario.
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The ECB minutes are expected to confirm the consensus that the central bank will remain on hold for now, waiting for clearer evidence of further disinflationary momentum.
Beyond the minutes, Europe will provide a host of hard economic data, including industrial output, retail sales, and updated inflation figures (both CPI and PPI).
A quiet week for Chinese macro data contrasts sharply with Latin America, which is due for a raft of inflation releases, consumer confidence reports, trade figures, and GDP updates for several smaller economies.
India’s latest Purchasing Managers’ Indexes (PMIs) will offer a pulse check on Asia’s growth engine.
Finally, OPEC+ members are scheduled to meet to agree on their production strategy. Their deliberations come at a time when oil prices are under pressure. The core conflict within the group—namely, whether to prioritize market share (favored by Saudi Arabia) by increasing supply or price stability (desired by Russia, which faces sanctions constraints on its oil shipments) — will determine the tone of crude markets in the short term. Market expectations suggest they will opt for a controlled supply increase, maintaining downward pressure on prices.
