The Week Ahead: 12 – 16 October

Imogen Bachra shares her take on to watch in the week commencing 5 October. 

Highlights:

1. France remains the key driver of European market sentiment

• Initial optimism around fiscal consolidation commitments from the Rassemblement National’s Marine Le Pen and supportive comments from the ECB has faded.
• France’s budget draft reaches parliament this week, with the possibility of an immediate attempt to block it through a confidence vote.
• While the base case remains that a budget will eventually pass, further political uncertainty could weigh on markets and keep French government bond spreads elevated.

2. Euro weakness may be nearing its limits

• Political and fiscal concerns in France have contributed to the euro’s recent underperformance against sterling and the US dollar.
• However, with the expectation that a French budget will eventually pass and significant risk already priced into European assets, the euro’s underperformance may be approaching its end.

3. Heavy European bond issuance adds to market pressures

• European government bond issuance is expected to reach its highest level in more than a month.
• The combination of increased supply and persistent fiscal concerns could make it more difficult for markets to absorb new issuance.
• Investors will be watching closely for signs that political uncertainty is feeding into demand for European government debt.

4. US CPI takes centre stage

• Headline US CPI is expected to rise by 0.6% month on month, driven largely by higher gasoline prices.
• Core CPI is forecast to increase by 0.2% month on month, down from 0.3% in the previous month.
• Despite the moderation in monthly core inflation, annual core CPI is expected to edge up from 2.4% to 2.5%.
• Unless inflation significantly exceeds expectations, the data is unlikely to force the Federal Reserve into a rate hike as soon as October.

5. UK growth could strengthen the case for a November rate rise

• UK GDP data for August is expected to show some moderation following stronger preceding months, but should still point to robust growth in the third quarter.
• While the figures may have limited immediate market impact, continued economic strength could bolster the case for a Bank of England rate rise as soon as November.
• Several Bank of England policymakers are scheduled to speak this week, although limited new guidance is expected given their recent public comments.

6. UK fiscal risks could challenge the recent resilience of gilts

• UK government bonds have held up relatively well during the recent market sell-off, with the UK viewed as being in a comparatively favourable fiscal position relative to other major economies.
• However, this resilience may become harder to sustain as the 28 October Budget approaches.
• With much of the positive news already reflected in prices, the balance of risks appears skewed towards further pressure on UK government bonds.
• Investors will be watching Budget-related headlines for clues about proposed policy measures and, crucially, how they will be funded.

Good luck!