Philip Marey, Senior US Strategist at Rabobank, discusses the current state of inflation and market responses, particularly in the US and Europe. As the weekend approaches, markets are exhibiting caution, evidenced by recent declines in US stock indexes and fluctuating 10-year Treasury yields. Anticipating a fiscal policy announcement from China’s finance minister, which is expected to unveil 2 to 3 trillion yuan in new spending, investors are concerned about execution and the potential impact on global markets. Additionally, tensions in the Middle East regarding Israel’s expected retaliation against Iran create further uncertainty. On a positive note, the UK reported a modest GDP growth of 0.2% in August, contrasting with previous stagnant growth.
In the US, recent Consumer Price Index (CPI) data revealed higher-than-expected inflation figures, with headline inflation at 2.4% and core inflation inching up to 3.3%. These figures were above Bloomberg consensus expectations. Month-on-month data also showed inconsistent trends, with the headline increase at 0.2% instead of the anticipated slowing to 0.1%, and core inflation rising by 0.3%. Certain components within the core inflation data, especially those related to non-housing services, indicated stronger pressures than previously observed. Despite these potential inflationary signals, shelter inflation appears to have moderated slightly. This suggests core inflation remains stubbornly high even as some movements, like the drop in shelter inflation rates, provide a sliver of hope for policymakers.
Jobless claims in early October surged to 258,000 from 225,000, marking a significant increase attributed partly to weather disturbances caused by Hurricane Helene. However, analysts believe this spike will not influence the Federal Reserve’s assessment, as overall employment growth and an improving labor market narrative are more compelling. Despite the mixed inflation signals and recent job data, the Fed seems predisposed to continue a path of monetary easing, with discussions around maintaining a neutral monetary policy stance gaining traction among Fed officials. Notably, several members expressed confidence in a long-term decline in inflation rates, bolstering support for further rate cuts.
Insight into overseas economics reveals a pressing federal budget discussion in France. Prime Minister Michel Barnier outlined a 2025 budget that seeks to address a looming deficit that could reach 7% of GDP without interventions. His proposed strategy involves a €60 billion reduction in the deficit through spending cuts and increased taxation, particularly targeting wealthy individuals and large corporations. However, the budget’s future is precarious; Barnier’s call for flexibility on budget amendments, given the lack of parliamentary majority, raises concerns about the potential dilution of effective fiscal measures and highlights the challenges of passing credible economic reforms in the current political landscape.
Market reactions are anticipated regarding France’s credit rating and fiscal health. Analysts expect a downgrade from Fitch, which currently rates France at AA- with a stable outlook. The agency previously downgraded France partly due to fiscal concerns and political stalemates. Following the budget proposal, Fitch is likely to review the rating, with the potential for a downgrade reflecting apprehensions about the government’s capability to instigate necessary fiscal consolidation amidst ongoing political upheaval.
Overall, Marey’s analysis suggests a complicated interplay of economic signals influencing market sentiments globally. While US inflationary trends present challenges to economic stability, European nations like France grapple with pressing fiscal issues amid political uncertainty. The anticipation of new policies from China alongside developments in the Middle East further complicates the picture, necessitating vigilance from investors and policymakers alike as they navigate this multifaceted economic landscape.
