Fed call revised amid government shutdown

In focus today

Today is expected to be quiet, with no major market movers on the agenda.

This evening, Fed's Bostic and Kashkari are set to speak, potentially offering insights into how delayed data from the US government shutdown will influence monetary policy.

Overnight in Japan, August wage data will be released - the last release ahead of the Bank of Japan's October policy meeting. Stronger wage growth is a prerequisite for further rate hikes from the BoJ. While June and July saw solid gains on the back of strong summer bonuses, a revision to July's data means annual real wage growth remains subzero. August data should further reflect the solid wage pickup negotiated in the spring.

Early tomorrow morning, the Reserve Bank of New Zealand (RBNZ) will have a monetary policy meeting. We expect a 25bp cut to the policy rate to 2.75%, but it will be a close call between 25bp and a larger 50bp move. Markets are slightly favouring a smaller cut, with 36bp priced in. Analyst consensus is divided but also leans towards a 25bp move. 

Economic and market news

What happened overnight

This morning, we made a small adjustment to our Fed call. Previously, we expected the Fed to deliver its next rate cut only in December, but we think that the shutdown-driven delay in data releases will tilt the FOMC to cut rates already later this month. We still think the Fed to cut rates only gradually later on, and expect 25bp cuts in October, January, April and June (prev. December, March, June and September). We maintain our terminal rate view at 3.00-3.25%.

What happened yesterday

In the euro area, August retail sales increased modestly by 0.1% m/m (prior: -0.4%) aligning with expectations. Investor confidence also improved, as the October Sentix index climbed more than expected to -5.4 (prior -9.2). Both current conditions and expectations strengthened, reflecting improved global sentiment despite the ongoing US government shutdown. Germany also saw gains, though its current situation remains firmly in recession territory.

In France, newly appointed French PM Lecornu resigned. As a result, French government bonds came under heavy pressure and the yield spread between 10Y French and German government bonds widened to 89bp at its peak before retracing to around 85bp for the remainder of the session. Lecornu's resignation followed a backlash from appointing a broadly unchanged cabinet reshuffle from Bayrou's period as prime minister. Late Monday evening, President Macron said he would give Lecornu until Wednesday to conduct final negotiations. If the last-minute negotiations fail, this leaves Macron with two options of either appointing a new PM and attempt to get a watered-down version of the 2026 budget passed or dissolve the Assemblée National and hold legislative elections. In our view, it is increasingly likely that an election will be called. Regardless, the political turmoil means that it is increasingly likely that the 2025 budget will be extended into 2026, and hence that fiscal consolidation measures will not come into effect. This should continue to put pressure on French government bonds.

Equities: Equity markets extended gains yesterday, printing yet another round of all-time highs. However, the regional divergence was striking, and for once, not macro-driven but politically anchored. Japan stood out on the positive side, supported by expectations of renewed fiscal stimulus under the likely incoming prime minister. In contrast, Europe lagged, led lower by France, where political paralysis deepened as Prime Minister effectively threw in the towel barely a month after taking office. French banks bore the brunt of the move, driving underperformance in the European financial sector. In the US yesterday, Dow -0.1%, S&P 500 +0.4%, Nasdaq +0.7% and Russell 2000 +0.4%. This morning, Asian markets are again trading in positive territory, led by cyclical names, while European and U.S. futures are broadly flat, thought with Europe marginally outperforming.

FI and FX: French politics is dominating European news flows and putting further pressure on OAT pricing. In the US, focus remains on the government shutdown and the resulting absence of data releases. We have adjusted our Fed call and now expect the next rate cut in the upcoming October meeting, rather than in December. In Sweden we get the budget outcome for September, where we expect a larger deficit than initially forecasted by the debt office, likely adding to expectations for a further increase of government borrowing once the new borrowing plan is published late November. Finally, the EUR denominated IPO on the Swedish stock-exchange might put pressure on EURSEK.