Week Ahead: US Government Remains Closed, China is on Extended Holiday, and Markets Hardly Notice

The US federal government was forced to close by the inability of Congress to pass a single appropriations bill for the new fiscal year that began October 1. Despite the disruption for government workers and their families, and in projects, which the White House has targeted opposition-led states, the capital markets barely took notice, except for the missing high-frequency data, including the September employment report. The S&P 500 and Nasdaq set new record highs ahead of the weekend. So did Europe's Stoxx 600, the MSCI Asia Pacific Index and the MSCI Emerging Market Equity Index. The 10-year US Treasury yield fell nearly three basis points last week, the most among the G10. The two-year Treasury yield fell by a little more than five basis points and that includes the nearly three-basis-point increase ahead of the weekend. For its part, the dollar fell against the all the major currencies, but the Canadian dollar, the laggard in a soft greenback environment.

 

The US government shutdown will carry into next week, and an off-ramp does not seem to be on the immediate horizon. Both sides seem to think there are advantages for their side come next November's midterm election. Japan's LDP picked Sanae Takaichi as its next leaders and most likely will be Japan's next prime minister (a vote in the Diet is expected later this month), and its first woman leader. The Czech Republic goes to the polls and populist Babis is expected to win. One implication is that it may reduce its direct military assistance to Ukraine. The lack of US government data, and the extended holiday in China keeps the news from the two largest economies to a minimum. The Reserve Bank of New Zealand is the only G10 central bank to meet in the week ahead. Economists are more sympathetic to a 50 bp cut than is the swaps market. The data highlights include labor earnings and household spending in Japan, Germany's factory orders and industrial production, and Canada's trade and employment data. Mexico reports September CPI and industrial production. 

US

Drivers: The Federal government is shut, and history shows that it typically has little impact on the capital markets or the economy. The rule of thumb is that every week it is closed shaves GDP by 0.1%. Given the plethora of Fed data and private sector data available, and the setting of monetary policy not for the conditions now but what they will likely be in a few months, given the lagged effect of monetary policy, a rate at the end of the month still is the most likely scenario. That said, deal to re-open the government does not appear imminent. Indeed, an off-ramp still seems difficult to envision. 

Data: Federal Reserve data will still be published while the government is closed. In the week ahead this includes August consumer credit and the FOMC minutes. The highlight of the minutes may be the coverage of Miran's first meeting and his claim that President Trump's policies have lowered the real neutral rate (r*) to near zero. The University of Michigan preliminary October consumer survey will be released at the end of the week. Despite the shutdown, the Treasury will proceed with its fund raising and will sell almost $119 bln of coupons and more than $250 bln of bills. 

Prices: The Dollar Index snapped a two-week advance last week, slipping around 0.4%. Still, a broad consolidative tone emerged. A break of the 97.40-98.15 range may be important from a technical perspective, but the market appears to be looking for new incentives. Yet, the underlying sentiment remains bearish. 

EMU

Drivers: The euro's downside momentum seen following the FOMC meeting on September 17 has eased. It still appears to broadly track the US-German two-year interest rate differential. 

Data: German reports factory orders, industrial production, and trade figures in the coming days. The largest economy in Europe continues to struggle. It stagnated in H1 and the median forecast in Bloomberg's survey suggests it may have grown by 0.1% in Q3. France's trade balance and Italy and Spain's industrial output reports are also due, but the market impact is typically meager. Meanwhile, French Socialists say the Prime Minister Lecornu's budget does not go far enough and it could still vote against the government in a confidence vote that could be held in the coming days.  Moody's reviews its Aa3 (AA-) credit rating for Belgium at the end of next week. It has a negative outlook.  Belgium's 10-year yield is around Spain's, around 55 bp higher than Germany, while the two-year yield is a few basis points higher than Spain's and around nine basis points higher than Germany. 

Prices: The euro rose around 0.25% last week. It was the seventh weekly advance in the past 10 weeks. It needs to rise above $1.1780, and ideally $1.1815 to be technically important. On the downside, it has not been below $1.1645 since the Fed cut rates on September 17. Last week's low was slightly below $1.1685. The momentum indicators have not turned up, allowing the consolidative phase to extend a bit longer.

 

PRC

Drivers: Chinese officials continue to have the yuan shadow the dollar. Chinese markets have been closed for the national celebration beginning October 1. They reopen Thursday, October 9. 

Data: China may report September reserves and lending figures in the holiday-shortened week. The gold market may be sensitive to update of the PBOC's gold purchases. 

Prices: When the mainland markets closed for the national holiday, the dollar was near CNH7.1300. Since then, it has traded between about CNH7.1225 and CNH7.1400. While dramatic movements without the mainland are rare, the next move seems likely to be on the downside. 

Japan

Drivers: The yen remains sensitive US rates, but with Takaichi winning the LDP leadership contest, and likely becoming the next prime minister, the JGB market could be impacted by her stimulus commitment  campaign endorsement of a supplemental budget. She wants to the BOJ to maintain an easy monetary policy stance, saying that the government is responsible for both fiscal and monetary policy, and that the central bank is tasked with adopting best methods on monetary policy.  

Data: Labor earnings and household spending may impact expectations for the BOJ, but the market is discounting around 75% chance of hike before the end of the year (a smidgeon lower than last week) and a little more than 56% for a move this month (which is actually slightly higher than at the end of the previous week despite the unexpected jump in unemployment). In the middle of the week, the August current account surplus will be reported. Capital flows in the form of the return on past investments, drives Japanese current account surplus. It runs a small trade deficit, despite an extremely undervalued yen by most reckoning. 

Prices: The dollar was turned back from almost JPY150 on September 25-26. It fell to about JPY146.60 last week. The trendline drawn off the year's low in April (~JPY139.90) and the early July low (~JPY142.70), and violated on an intraday basis but not on a closing basis on the Fed's rate cut on September 17) begins the new week near JPY146.50 and finishes the week around JPY146.70. A break could target the September 17 low near JPY145.50, which was a two month low. On the other hand, given the Takaichi's election, the dollar's upside may be the initial path of least resistance. A move above JPY147.85 may signal a move into the JPY148.25-65 area. 

UK

Drivers: Sterling is sensitive to the broad direction of the US dollar as reflected in the Dollar Index. The inverse correlation over the past 30 days is near 0.90 and 0.85 for the past 60 days. Still, there are times that the movement of long-term UK Gilts seem to impact the exchange rate in extremes. 

Data: The UK's economic diary is light in the coming days. The construction PMI and house prices are the main high-frequency data points. And typically have minimal market impact. 

Prices: Sterling's continued recovery in the first part of last week stalled near the (50%) retracement of the decline since the Fed cut rates, which is found around $1.3525. A move above here targets the $1.3570 area. Support is seen near $1.3400, but it may take a break of $1.3370 to signa a retest on the recent low around $1.3325. The momentum indicators seem somewhat supportive. 

Canada

Drivers: The broad direction of the US dollar is still the single more important driver of the Canadian exchange rate. The rolling correlation between changes in the Dollar Index and the USD-CAD exchange rate is near 0.65. It has not been below 0.60 for more than five months. The inverse correlation with the S&P 500 is at a new extreme for the year near -0.55, underscoring the element of the risk-on/off in changes in the exchange rate. Trade tensions with the US and China have weakened the economy and the swaps market has about an 95% chance of another cut in Q4. 

Data: Given the trade drag on Q2 GDP, Canada's August merchandise trade balance on October 7 will draw market attention. The goods trade deficit in the first seven months was about C$24.5 bln. In the Jan-July period in 2024, the merchandise trade shortfall was roughly C$3.5 bln. Job growth has also slowed dramatically this year in Canada and the September employment report will be released on October 10. In the first eight months of the year, Canada created about 37.5k jobs, including the loss of about 800 full time positions. In the same period in last year, Canada grew 210k jobs, of which almost 87k for full time posts. The unemployment rate stood at 7.1% in August, the highest since the pandemic. It was at 6.7% in August 2024. 

Prices: The US dollar reached CAD1.3985 last week, its best level since May. It held barely below the 200-day moving average (~CAD1.3990) and has not closed above it since April. A band of technical resistance extends toward around CAD1.4020. The momentum indicators are getting stretched and could turn down in the coming days. While not preventing a break of the band of resistance, it warns that the break may not be sustained. A push below CAD1.39 would boost the chances a high is in place. 

Australia

Drivers:  The Australian dollar's rolling 30-day inverse correlation with changes in the Dollar Index remains a robust near -0.80. It reached the most extreme of the year in August near -0.85. The correlation with changes in the two-year interest rate differential between the US and Australia is a little above 0.25 but near -0.60 correlation with changes in the two-year US yield. 

Data: Australia's economic diary is sparse, with a few bank surveys. On the other hand, the Reserve Bank of New Zealand meets early on October 8, and a rate cut is a foregone conclusion. It has cut in the previous eight meetings, and the cycle will be extended. The overnight cash target rate is 3.0%. The easing cycle began last August when the target rate was at 5.50%. The swaps market is pricing in a terminal rate of about 2.25%. It is discounting one more cut this year after this week's move, implying the easing cycle carries into next year. Sweden's Riksbank Deputy Governor Breman has been appointed the next RBNZ governor starting December 1. 

Prices: The Australian dollar rose nearly 1% last week after it declined by about 1.6% in the previous two weeks. The week's high was recorded on Tuesday slightly below $0.6630. While Tuesday's high held in the second part of the week, so do it low (~$0.6570). The momentum indicators warn that the sideways trading in recent days may persist, the risk seems to be on the upside. A move above the $0.6630-35 area, a retracement object, and a potential neckline of a small bottoming pattern, could retarget the $0.6700 area.

 

Mexico

Drivers: The rolling 30-day correlation of changes in the USD-MXN exchange rate and the Dollar Index is slightly above 0.75. It reached almost 0.85 late last month, the highest in more than a decade. The rolling 60-day correlation is near 0.75 and it is also the highest in more than 10 years. The rolling 30-day correlation with changes in the US two- and 10-year yields is a little above 0.30, easing since the high for the year was seen in late September. 

Data:  The Bank of Mexico meets next on November 6, but the September CPI (October 9) is the last full month inflation that it will have in hand. By the time it meets, the CPI for the first half of October would have been released. While the headline rate remains within the target range (3% +/- 1%), the core rate is above 4%. Nevertheless, the central bank is more concerned about growth and expects price pressures to ease. Industrial production figures are due October 10. It has fallen by about 0.70% through July this year. After growing by 0.6% in Q2, the Mexican economy may have stagnated in Q3. Year over year, growth in Q2 rose by 0.1%. The overnight cash target rate is 7.50%. The swaps market has begun considering the risk that the terminal rate is closer to 6.75%. 

Prices: The US dollar trended lower against the peso in the first half of September and recorded a new low for the year on September 17, near MXN18.20. Since then that dollar has been trading choppily but higher. It reached almost MXN18.5650 in late September and fell back to nearly MXN18.24 in the middle of last week. It rose to a high around MXN18.5160 last Thursday and consolidated quietly ahead of the weekend. The dollar has not settled above MXN18.50 since September 10. Near-term conviction is weak, but the interest rate differential pays to be long peso. Yet, a close above MXN18.50-51 may target the MXN18.60-65 area. 

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