Ebury Market Weekly Report: Safe Havens Shine as US Shutdown Drags On

Last week, traders flocked to traditional safe havens, like gold and the Swiss franc, but equities held on to record highs. Meanwhile, bonds and the Euro traded sideways, generally staying well within recent ranges. To make matters even harder to interpret, there were some rumblings of concern about credit quality in the US following a handful of high-profile blowups, though credit spreads remain at very low levels in absolute terms. Emerging market currencies generally rallied, though the moves were contained and difficult to interpret.

Enrique Díaz-Álvarez, Chief Economist at Ebury said: “The drought in US data, brought about by the federal shutdown, will ease a bit this week, as the CPI inflation report for September is published on Friday, to allow adjustments to social security pensions. Economists expect yet another monthly print in the 3-4%, far above the Federal Reserve target and an apparent contradiction with the central bank’s increasingly dovish stance. Inflation numbers for September will also be published in the UK on Wednesday. Friday promises to be a volatile day: in addition to the US inflation report, the PMI leading indicators of business activity for October will be released worldwide.”

USD

The lack of economic data, caused by the US government shutdown, is forcing the market to perhaps overinterpret other developments, such as recent hiccups in US private credit. So far, we see no systemic implications in these accidents. The macro backdrop (monetary easing in spite of high inflation) should be favorable to credit, but we are paying close attention. We expect this Friday’s delayed inflation data to show no further progress towards the Fed’s target, with headline and core inflation both printing in the 3-4% annualized range. None of this is likely to stop the Fed from easing at each of its next two meetings, especially given the uncertainty caused by the absence of fresh labour data.

GBP

Labour market data in the UK continue to indicate gradual loosening, with little job creation but as yet no sign of significant job losses. This is consistent with the message from monthly GDP numbers, which continue to show an economy growing at a modest pace of around 1%. The Bank of England increasingly faces a similar conundrum to the Federal Reserve, as labour market weakness coexists with inflation figures still significantly above targets. This week’s inflation data is pivotal to the next moves in interest rates. The Bank of England seems to have little appetite for a full easing cycle as long as inflation remains closer to 4% than 2%, the central bank’s target.

EUR

The French government seemed to gain a parliamentary reprieve last week, but market relief was tempered by the fact that this came at the cost of jettisoning its modest pension reform plans. French sovereign debt received an unexpected credit downgrade over the weekend, but early Asian trading suggests markets are largely ignoring it. Having recently concluded its easing cycle, the ECB's task seems simpler from here than that of the Bank of England or the Federal Reserve. However, last week’s upward revision in Eurozone core inflation is a reminder that the threshold for additional cuts remains very high.