Week of October 13

A relatively quiet economic calendar last week allowed geopolitics to be the leading market driver, even as events such as the FOMC's minutes and the RBNZ rate decision took center stage.

The week ahead sees an active economic calendar with China trade balance and UK monthly GDP headlining, as well as US CPI figures if the government shutdown ends in time.

Week in Review

The primary focus for the markets was the developments in geopolitics, with no progress towards ending the US shutdown and political troubles in France weighing on risk appetite. The FOMC minutes mid-week helped reassure investors that the Fed would indeed go through with the expected two rate cuts during the rest of the year. The minutes conveyed the impression that the Fed was now more worried about the jobs market than inflation, making the case for continued easing.

The RBNZ surprised markets by delivering a jumbo 50bps cut, rather than the 25bps expected. The bank also provided a dovish tone, saying it was open to more cuts if needed.

A plethora of ECB officials made public comments during the week, largely echoing prior rhetoric that policy was in the right place with inflation on target, though several noted growth risks and economic uncertainty.

In geopolitics, the US government shutdown continued for another week, with no signs that either side was willing to compromise just yet. In the Middle East, Hamas accepted a ceasefire proposal backed by Israel and the US as a first step towards ending the conflict. French Prime Minister Sebastien Lecornu presented his new Cabinet, but opposition from Parliament led to his resignation just 14 hours later. President Emmanuel Macron mandated Lecornu to reach a budget deal before the October 13 deadline, while searching for a new Prime Minister. Japan LDP leader Sanai Takaichi's bid to become Prime Minister suffered a setback when the junior coalition partner, the Komeito party, said it would leave the coalition and not support the LDP candidate. However, Takaichi's party is still the largest in Parliament, and would likely still become Prime Minister when the vote occurs. Protracted political negotiations have led to continued delays in the parliamentary vote to invest a new Prime Minister.

Biggest Market Movers

●    The yen was the worst-performing major currency, posting the largest weekly drop in a year amid political wrangling in Tokyo.
●    Gold rose for the eighth consecutive week amid expectations of Fed easing and prolonged uncertainty amid the US government shutdown.
 
●    Brent prices initially rose after OPEC+ didn't increase production as much as expected, but then later fell after Israel and Hamas reached a deal to de-escalate the two-year war.
●    The NZDUSD fell to the lowest level since April after the RBNZ cut rates by more than expected.

Week Ahead

The US government shutdown is likely to remain an important factor for markets until the spending gridlock is resolved. An agreement could mean the release of key data, such as the pending NFP report and the scheduled CPI data. Other geopolitical events that will keep the market's attention include the budget proposal in France. A new government could be formed, or political pressure could prevail, forcing Macron to call new Elections.

US CPI Might Come Out

The release of September US CPI figures is scheduled for Wednesday, but will likely be postponed due to the government shutdown. Media reports suggested that the BLS has recalled staff to calculate the September CPI data, as it is essential for calculating the cost-of-living adjustment for Social Security payments. Still, it wasn't clear when the data
could be made available to the public. The expectation is for headline inflation to rise to 3.0% from 2.9% the month before, while the core rate is projected to decline to 3.0% from 3.1% previously. Here, the absence of data could also be significant, as over the last several months economists have projected inflation will remain elevated due to the effects of tariffs. But each time the date comes out, it has shown minimal impact from the trade levies. If the data doesn't come out, markets will have to operate on estimates, which could suggest inflation is higher than it actually is and increase fears the Fed won't ease as much. Gold could be the most affected asset. Depending on when the data is released, it could cause a retracement in gold prices towards recent lows around $3,750 per ounce. On the other hand, an unexpected drop in the inflation rate could push gold towards the round $4,200 level.

UK Economy Eking Out Growth

There are several important data points from the UK this week, but given the level of attention on the Autumn Budget, the GDP figure could have the largest impact on the markets. August's monthly GDP is projected to accelerate to 0.1% from 0.0% prior.
Economic growth could increase the headroom the Chancellor has to balance the government's books. The UK unemployment rate is projected to remain unchanged at 4.7%, while the claimant count is expected to decline to 12.0K from 17.4K. The lack of signs of increasing "slack" in the labour market might keep the BOE from easing at the upcoming meeting. Signs that the UK economy remains resilient could propel the GBPUSD towards the October high of 1.3500, but weaker jobs growth could leave the pound falling towards support at 1.3180.

China Trade Remains Bouyant

China's trade balance will come out early on Monday, with its September surplus declining to
$96.0 billion from $102.3 billion a month earlier. However, that's because exports are expected to accelerate more slowly than imports. Goods shipped into China are projected to
 
speed up to 3.5% from 1.3% a month earlier. Meanwhile, exports are expected to grow by 5.2%, up from 4.4% in August. The Aussie dollar could be the most sensitive to the data release, potentially breaking below the 0.6520 support level. Improving Chinese exports could support the Aussie and help it move towards resistance at 0.6620.

Other Events and Earnings

Tuesday has the release of the minutes from the last RBA meeting. Chinese inflation comes out on Wednesday. Thursday includes US retail sales. Friday sees the final read of Eurozone CPI and US housing starts data.

Third quarter earnings season unofficially kicks of on Tuesday with reports from major US banks, and a host of companies issuing reports, including Fastenal, JP Morgan, Johnson & Johnson, Wells Fargo, Goldman Sachs, BlackRock, ASML, Bank of America, Morgan Stanley, Abbot Laboratories, Infosys, and American Express.