Weekly focus: Market jitters on new US regional banking worries

Trade war has once again been a dominant theme in markets, after US president Trump threatened an additional 100% tariff on Chinese goods last week. We see it primarily as a negotiation tactic, but even if the threat takes effect on 1 November, the economy would be much better prepared than six months ago. Equity markets rebounded on expectations that trade disputes will be solved.

With no official US data in on account of the government shutdown, bond markets have taken their clues from Fed chair Powell's worries about the labour market and his take that tariffs, rather than broader inflationary pressures are driving elevated goods prices. His remarks pushed global bond yields lower and the move was further exacerbated by renewed concerns over regional bank credit quality in the US following the disclosure of problematic loans at Zions Bancorp and Western Alliance Bancorp. It adds to a growing list of investors' worries and the news also weighed heavy on equity markets and caused a big spike in the VIX index.

The private NFIB business sentiment did offer some interesting insights into how small US businesses see the outlook, while we wait for official data. Optimism declined on rising concern of tariff-related issues. At the same time, price plans edged higher, which has historically led changes in the official CPI by few months.

On our own continent, the French Prime Minister Lecornu survived two no-confidence votes after caving in to the Socialists' demand to suspend the pension reform, which led to OAT-Bund spread tightening. While positive in the short term, a complete reversal of the pension reform will place additional strain on France's already weak public finances. In fact, Moody's has France up for review next week.

Next week kicks off with the monthly batch of Chinese data, which will likely show that the domestic economy is still weak with housing and private consumption struggling. Elsewhere in Asia, negotiations to form a new Japanese government are ongoing and things are more unpredictable than seen in many years. There are different opinions on the right extent of fiscal as well as monetary stimulus. That said, the ruling Liberal Democrats sit on 42% of the parliamentary seats and it remains most likely they will continue to govern, although not without serious concessions to a potential coalition partner. A parliament vote for prime minister is scheduled for Tuesday.

In the euro area, PMI data stands out on the agenda. We expect the euro area economy to be close to stagnant in the second half of 2025, which aims with composite PMI close to unchanged just above the 50-thresshold.

In the US, focus will be on trade negotiations and of course the delayed September CPI print. We see core CPI at 0.3% mom for a third consecutive month with risks to the upside but also the bar for Fed skipping its planned rate cut on 29 October as very high. US PMI data might also catch more attention than usual. US data will probably continue to be scarce, with prediction markets assigning roughly an 80% probability that the shutdown will extend into November.