The US government shutdown in the meantime is a fact

Markets

EMU and US bond markets were some kind of paralyzed yesterday. Data were too close to consensus to unsettle market expectations on monetary policy. At the same time investors kept cautious at the final day of the quarter while at the same time looking forward to upcoming political and/or data-event risk. German yields changed less than 1 bp across the curve. National CPI data were mixed with softer-than-expected French inflation being countered by slightly higher-than-expected releases in Germany, Italy and Spain (on Monday). This puts the risk for today’s (Flash) EMU CPI slightly to the upside. Even so, it doesn’t change the prolonged wait-and-see modus for ECB policy. US yields eased 1-2 bps across the curve. JOLTS job openings printed marginally stronger than expected and other details of the series at least didn’t suggest a rapid deterioration in US labour market conditions. At the same time, US consumer confidence eroded further (94.2 from 97.8). The looming US government shutdown had only marginal impact, if any at all, as there is currently no debate on the debt ceiling/debt payments. US equities traded with a positive bias (S&P 500 +0.41%, close less than 0.2% from all-time record). The dollar lost modest ground (DXY close 97.78, EUR/USD 1.1734 & USD/JPY 147.9). All these cross rate are holding firmly with the established ranges).

 Asian (equity) markets trade mixed this morning. Japanese markets underperform as a solid BoJ Tankan report supports the case for further BoJ easing later this month (cf infra). Most other markets are trading in green. The US government shutdown in the meantime is a fact. Markets in the first place are focused on a delayed release of key data (including Friday’s payrolls). At the same time, question is to what extent it will undermine growth going forward. In a first reaction, the dollar is ceding further ground. USD/JPY currently trades near 147.55. EUR/USD gains to the 1.175 area. If anything, a long shutdown, might weigh on US real yields and in this respect might also be a slightly negative for the dollar. Regarding regular data, the eco calendar today contains the flash EMU CPI data (headline expected at 0.1% M/M and 2.2% Y/Y from 2%, core unchanged at 2.3%). In the US, the ADP private job growth (+ 51k from 54k expected) and the US manufacturing ISM (49 from 48.7 expected) take center stage. With some uncertainty on the government shutdown lingering, we hold the view that markets (yields, dollar) might be a bit more sensitive to negative rather than to positive surprises.

News and views

A solid Tankan survey for the third quarter in Japan is adding to the case for the Bank of Japan to resume rate hikes later this month. Large manufacturers are more upbeat with the index rising from 13 to 14. The forward-looking gauge matched Q2’s 12, suggesting they are largely shrugging off tariff-related uncertainty and pressure. The non-manufacturing sector was as optimistic as they have been in recent quarters with business conditions (34) seen most favourable in around 34 years. Their outlook (28) improved to similar historic levels. Capex spending across all industries in the fiscal year from April would climb to 12.5% from 11.5%, more than the 11.3% expected. Japanese businesses see inflation at 2.4% in five years. That’s above the central bank’s 2% target and an acceleration from Q2’s 2.3%. This price gauge is closely watched by the Bank of Japan. The Japanese yen barely budged on the release but later strengthened a tad against an overall weaker US dollar. USD/JPY trades around 147.6. Japanese (money) markets are now on the lookout for potentially important speeches by BoJ deputy governor Uchida and governor Ueda tomorrow and on Friday and LDP chair (and therefore PM) elections this weekend.

The Indian central bank (Reserve Bank of India, RBI) left its benchmark rate unchanged at 5.5% this morning. The unanimous decision and the bank’s current neutral stance was accompanied by language that kept all options open. Governor Malhotra said that there is policy space for further supporting growth but warned that (earlier) front-loaded monetary policy actions and fiscal measures are still playing out while trade-related uncertainty is still abound. The most prudent choice was for the central bank to wait for the impact to unfold. The RBI raised its growth forecast for the FY ending March 2026 to 6.8% from 6.5% while downgrading the inflation projection to 2.6% from 3.1%. The Indian rupee steadied near the record lows of USD/INR 88.71.

Download The Full Sunrise Market Commentary