For now, the adagio ‘no news is good news’ reigns

KBC Market Research Desk KBC Bank

Markets

The US government shutdown to a large degree translated into a ‘market info shutdown’. US data releases including jobless claims and factory orders were delayed, depriving investors of some potential drivers. Especially jobless claims over the previous weeks showed some (intraday) market moving potential. With no key data in other developed economies like the EMU or the UK, this only reinforced the low volatility environment. This not only applies to US equity markets but also to interest rate markets and FX. A measures of US bond market volatility has dropped to the lowest level since end 2021! As a point in case. US yields yesterday changed between + 0.4 bp (2y) and -2.1 bps (30-y). German yields in similar directionless trading eased between 0.3 bps (2-y) and -2.5 bps (30-y). For now, the adagio ‘no news is good news’ reigns. The S&P 500 closed at a marginal new all-time record. The EuroStoxx 50 decisively confirmed Wednesday’s break into uncharted territory (+1.15%). A similar low-volatility narrative also plays in the major dollar cross rates. The dollar didn’t budge despite a positive risk sentiment and the prospect/hope of Fed easing. DXY gained marginally (97.85) but perfectly holds in the 96.21/98.83 short-term consolidation range. Idem for EUR/USD (close 1.1715 from 1.1732). Even the yen, one of the more outspoken directional trades in major FX this week, wasn’t able to maintain its momentum. After a failed test of the 150 area end last week, the yen rebounded yesterday after running into resistance in the USD/JPY 146.60 area. Comments supportive of a (potential) rate hike at the end of this month from deputy government Uchida, didn’t help further yen gains.

Most Asian equity markets continue a (tech-driven) rally this morning with Japan one of the outperformers. China and South Korea are closed. Still the dollar gains marginally, with the yen this time underperforming after ‘balanced’ comments from BOJ governor Ueda (see below). An unexpected rise in the Japanese unemployment rate in this respect probably also doesn’t help (2.6% from 2.3%). Later today, the US labour market data won’t be published due to the shutdown, but markets at least have the US services ISM as one of the few remain guides in the run-up to the October 29 Fed decision. US confidence indicators recently suggested a further loss of momentum including softer labour market conditions. Today’s services ISM is expected at 51.7 (from 52) with the employment index near 46.5. With two follow-up 25 bps Fed rate cuts almost fully discounted, there is far less room for a similar reaction compared to this week’s ADP miss. Maybe it might still have some limited impact on the dollar, more than on US interest rates, with USD/JPY most sensitive even as Japanese domestic factors (LDP leadership vote) are in play.

News and views

Bank of Japan governor Ueda kept options open for the end-of-the month policy meeting. In a speech for local business leaders, he didn’t extend market momentum endorsing a 25 bps rate hike instead sticking to official guidance. “If the baseline scenario for economic activity and prices outlined so far is realized, the bank, in accordance with improvement in economic activity and prices, will continue to raise the policy rate”. On the economic front, the central bank monitors the global economy and the impact of US tariffs on Japan’s corporate profits. On the price front, wage and food inflation require attention. Ueda made no reference to domestic political uncertainty, but for sure keeps a close eye on local LDP leadership elections this weekend. The risk of snap parliamentary elections ahead of the next BoJ meeting is still a tail risk.

Bank of Canada deputy governor Mendes indicated that markets are too focused on the central bank’s “preferred” core inflation measures. They were introduced in 2016 under former governor Poloz with two of the three original ones remaining (trimmed mean and median). They show annual price pressures around 3%, but the BoC sees underlying inflation in the vicinity of 2.5%. Mendes argued that the way the central bank measures inflation will be part of next year’s framework renewal. As an example, he suggested revising inflation gauges so they all “pre-exclude mortgage interest costs”. The BoC revamped its cutting cycle in September after a six-month pause with money markets 50/50-split over the possibility of a new rate cut (to 2.25%) at the end of this month.

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KBC Market Research Desk

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