The Week Ahead – Locked and Loaded

Welcome to the NewsHour. President Trump tonight took a step that he has not yet taken in this second term, imposing major new sanctions on Russia. The Treasury Department announced the sanctions on Russia's two largest oil companies, accusing Russia of not taking President Trump's pursuit of peace in Ukraine seriously. Hello and welcome to the Week Ahead on Nomura Podcasts. I'm your host, Andrew Tysast from Nomura's Global Markets Research Team, and today's Friday, the 24th of October. Well, with the US government shutdown continuing, we've had only limited US data to look at over recent weeks, but that's perhaps only increased the focus on geopolitics. Over recent weeks, we've been tracking politics and fiscal matters in France, at the leadership race in Japan, ongoing and unpredictable US, China, tariff, trade headlines, and now a fresh US decision to impose sanctions on Russia's largest oil producers, with President Trump clearly unhappy about the lack of progress towards peace between Russia and Ukraine. You heard a snippet there courtesy of PBS News, noting that development, and which has boosted oil prices, in sharp contrast to the pullback in gold we've witnessed this week, after a pretty phenomenal surge this year. This week, our focus will be very much on central banks. We'll be tracking for the major ones, which are set to announce rate decisions next week. So in the US, a 25 basis point rate cut for the Fed seems pretty much locked and loaded. We'll be discussing that, the US government shutdown, and the Bank of Canada policy meeting two with David Seif in New York. In Europe, the ECB meets as well. I'll be checking in with Andres Japaniak in London to discuss the policy outlook there, and Yuchiro Nozaki from Nomura's research team in Japan will be along to preview the Bank of Japan policy meeting, and to share some thoughts on what the new coalition government under Senei Takeichi could mean for Japan. And finally, I'll briefly cover next week's key data in China, South Korea, and Australia. Enough there to keep us busy, I think, so let's dive in. Now, let's start with the US. I'm delighted to be joined here by David Seif, Nomura's chief economist for developed markets based in New York. David, welcome back to the podcast. Hey, let's start with the US government shutdown just quickly. I believe it obviously is continuing, and this is one of the longer ones. Any hints of a resolution or is pressure for a resolution rising? Well, hey, Andrew, wonderful to be back. There really have been no signs of progress up to this point, no signs of a resolution. So we are already at the longest ever full government shutdown and second longest government shutdown, even including the partial ones. We do see some catalysts around the end of this month that could lead to a resolution. So there really are three things that we are flagging. The first is on October 31st, the next payments to the military are due. And then on November 1st, just the day after, there are two key things then. The first is that it's the start of open enrollment for ACA. This is health insurance plans via Obamacare. And we think that this is something where it will put pressure on both sides to have the government open. And then maybe as or more important, the US food stamp program, also known as SNAP. So this is aid for people who need food assistance. That is only funded right now through the end of October. And so in theory, we'll become unavailable on November 1st. Now, some of these things, there may be some ability for the Trump administration to redirect some funds. But even if he's able to do that to pay the military and to fund food stamps for another month, the enrollment into ACA health insurance plans is going to become an issue. So we see these as potential catalysts, not too far down the road. But as of now, we seem to have no real negotiations going on, no signs of progress, and no signs that this is going to end anytime soon. Okay, got it. So yeah, so there's a couple of points on the calendar that we can keep an eye on. Now, look, the lack of official data releases that's coming with this government shutdown is a complication for us. And for the Fed too, of course, we've got the FOMC meeting next week, that's going to be a major focus. Now, as we record this, we haven't seen the September monthly CPI report. But with that qualification, what are you looking for from the Fed next week? Yeah, we think the Fed is going to cut next week by 25 basis points. We also think the Fed will announce an end to its quantitative tightening program at that meeting. I would say that if we look at QT, there is some chance that that will be pushed to December, the end of that. But last week, Powell and several others on the Fed all seemed to express support for that coming to an end. And so we don't see any reason for them to delay any further on that. Now, when it comes to the matter of rates, the rate cut of 25 basis points, it would really take, we think, an enormous surprise from the CPI data, which of course, as you mentioned, we have not seen yet. Our forecast is for a 0.4 percent core print. But it's a very, very narrow rounding up to it. We're 0.352 unrounded. And so we think it will round up to 0.4. But certainly much more risk, in our opinion, of a 0.3, which would be a consensus print than a 0.5. I think that it will take, again, an enormous move in either direction for the Fed to deviate from that. And that's really just because this is really the only piece of data they have. They do not know where the September employment report was or will be. And without that, and given that weakening or loss of momentum in the labor market was the primary rationale, we think, behind this more dovish shift on their part in September, without evidence that that has either gotten worse or better, we think it'll just follow the dot plot and cut 25 bits this month. Yeah, good one. Yeah, 25 basis points does seem to be pretty much baked in at this point. Now, finally, David, just north of the border, we've got a Bank of Canada policy meeting too. So I was hoping you could give us a quick compare and contrast. I believe we're looking for a 25 basis point rate cut there as well. We are. And that is a new call from us, one that we made this week. So we're looking for a 25 basis point cut from the Bank of Canada, bringing the rate to 2.25%. And that is a rate that we think will be the terminal rate, two and a quarter percent. Now, we had previously still expected one more cut from them, but we thought that that wouldn't be until December. Now we think it'll be in October instead of, and I want to emphasize that instead of in December. The main rationale behind that is that one, we had some very dovish comments from BSE Governor Tiff Macklin last week. He downplayed the strong September jobs report, pointed out that the jobs gained in September were less than the jobs lost the preceding two months referred to the data as volatile, meaning that he didn't pay too much attention to it. On top of that, we had a CPI report in Canada earlier this week. And the key thing is that although the headline number was higher than expected, when you take what I'll call a U.S. style for, or inflation ex food and energy, and you look at that on a three month basis, or like a three month rolling basis, which is what we think the Bank of Canada looks at a lot. It was for a second month in a row, only at 1.6%. So towards the low end of their one to 3% ban. And we think that is going to be enough on top of the dovish comments that Macklin made last week for them to move that cut up by one meeting and do a 25 basis point cut at this upcoming meeting. Okay, David, that's great. Thanks so much. Hope you have a great week ahead. My pleasure. Now, let's swing across to Europe and welcome Andres Japaniak from Nomura's global research team in London back to the podcast. Hey, Andre, how are you? Hey, Andre. Very well. Thanks yourself. Yeah, very good. Thank you. First question. Let's go to the ECB. We have a policy meeting and a press conference next week. Seems to be a pretty strong consensus that the key policy rate will be left on hold. So what will you be looking for from this meeting? Yeah, exactly that. So we are forecasting no change in the policy rate. So we are thinking the ECB will leave its deporate unchanged at 2%. As a reminder, that's very much the midpoint of where the ECB sees neutral. They have a sort of narrow band, 175 to 225. The focus, therefore, is going to be on guidance. We think the ECB will, regardless of sort of underscore emphasize a data dependent approach, a meeting by meeting approach, and essentially no change in its overall guidance. We think that God will highlight that the ECB is well positioned with rates at neutral to navigate ongoing uncertainty due to US policy and the spillovers thereof. The one thing we are looking for, and we do expect, is that the ECB will reintroduce an introductory paragraph in its statement, which discusses the recent evolution of economic data. Essentially, in September, they removed this due to heightened disagreement amongst governing council members. And we think the data since the September meeting has been more, I would say, unison in some senses, whereby inflation has been in line with the ECB staff forecast, and activity has been slightly stronger versus the ECB staff had expected back in September. And so we think this will then therefore result in reintroduction of this paragraph, cementing the idea that the governing council are in unison that October is very much on hold. Okay, that is interesting. Thanks. Hey, I'm looking further ahead. Markets seem reasonably confident that the ECB rate cut cycle may well be over. And the markets are also continuing to price, continuing Fed easing, maybe four or five more. Do you think that's a likely outcome? Could continuing Fed rate cuts drag the ECB back to the rate cutting table? So I think in our perspective, the ECB is done and dusted with its cutting cycle. We have no policy change. So we have no change the policy in our forecast horizon, effectively from the ECB's perspective. Look, inflation is at around target and expected average target next year and the year after. Likewise, growth is ticking up gradually, and we expected to get to pre-pandemic trend rate by the middle of next year, meaning having the depurated neutral makes a lot of sense. From the question we get from investors a lot is, can the ECB really stay on hold? And we think it can. You have many cases in history whereby the ECB is doing the opposite to what the Fed was doing. So think back to, say, 2016-17, when you had the Federal Reserve raising rates and doing constant tightening, whereas the ECB was cutting rates and doing QE. It's also worth bearing in mind, the Federal Reserve isn't necessarily expected to cut rates into accommodative territory. Their forecast to cut rates to neutral, which is a very different situation. If the Federal Reserve was all of a sudden cutting rates aggressively to support the economy, you probably have a sort of global slowdown in which case many other central banks, including the ECB, would also be forced to ease policy further. Yeah, thank you. Yeah, look, I think that's fair. Markets seem pretty comfortable with this sort of outlock, ECB on hold and Fed continuing to cut. Certainly there's no pressure on the currency front for the ECB to consider cuts. Things look pretty good there. Just a final question for you, Andre. On the data front, European data continues to be released and next week we'll get Euro area GDP and CPI data. Could either of those ones be interesting? In some sense, it's probably not to be fair. So we have October inflation data. We're forecasting a slight tickdown versus the previous months. We're forecasting Euro area HICP at 2.1% year-in-year. Essentially, core price momentum in October 25 should be basically unchanged versus October 24. At the margin, there are some downside risks. So for example, we had weaker crude oil prices and natural gas prices over the past six months, and that's still feeding into the disinflationary pressures. In terms of the country level, again, nothing too remarkable from that perspective. On the growth front, we do get the first estimate of Q3 2025 GDP growth. So we're forecasting slightly above what the ECB is expecting. We've brought the United Consensus. I would say the key thing to note there is we do expect continued divergence between the periphery and the core, whereby spade and Italy are expected to outperform Germany and France. Okay, got it. So continuing growth, a bit of divergence, inflation close to target and the cash rate there pretty close to neutral. Doesn't look like a bad backdrop at all. Andre, thanks so much. Thanks, Andrew. Turning now to Asia, we're going to start this week with Japan because there's a lot going on there. Luckily, we have Yachiro Nozaki from Nomura's research team in Tokyo here with us. Nozaki-san, the political situation in Japan, let's start there. That's been a big focus. We saw this week that Sanae Takayichi has become the new prime minister. Could you give us a brief summary? What policy implications do you see and what will be the immediate focus of the new government? On Tuesday, a vote to designate the PM was held and Takayichi was newly appointed to PM. There was a moment when she might not take the post when the Komeido left the coalition and the opposition was moving throughout the unification. But the JIP, Japan Innovation Party, newly joined the coalition and designation vote concluded successfully. Still, the ruling coalition falls slightly short of a majority in both houses, so political stability remains flat here. Takayichi has long carried an image of favoring expansionary fiscal policy, but the new cabinet members look balanced, and the policy proposal announced so far do not appear as expansionary as the market feared. JIP, party that newly joined the coalition, also traditionally favors a smaller government. She ordered the formulation of an economic stimulus package immediately after taking office, and it should be unveiled in middle to late November. The content and size of that package will be the first thing to watch. Discussion will then follow on next fiscal years tax reforms and budget formulation in December. On the diplomatic front, attention will focus on next week's meeting with President Donald Trump. It's possible messages about the increased difference panings could be conveyed. Okay, yeah, thank you. Look clearly a lot going on there. So, I guess fragile coalition stimulus package coming and then the Trump meeting to look forward to. I guess something else we'll be looking forward to is data. There's no lack of data coming, and in Japan we have industrial production and Tokyo CPI out next week. Could either of those reports be interesting? I'm more focused on Tokyo CPI, which will be released on next Friday. I expect the head dry inflation late to accelerate to 2.7% year near in October from 2.5% in September, but the acceleration would mainly reflect the fading of Tokyo's specific policy effects. Excluding that impact, inflation should continue to ease. Since October is the first month of the second half of the fiscal year and a common month for price revisions, so I'd like to watch developments in services and food prices. Okay, understood. And finally, we can't leave out the Bank of Japan because there's a policy meeting next week. We're always a big focus for markets. Pretty strong consensus. We won't see a rate change now at this meeting, but still it could be interesting. What do you expect from the BOJ next week? We also expect the policy late and changed. It's right after the new government took office. So, it should be hard for BOJ to release interest late now before sufficient communication between the BOJ and the government. We see three main points to watch. First, whether any board members beside Takata and Tamura who voted for a late hike at the September meeting will vote for a late hike this time. Second point is the outlook for the economy and prices. We expect both GDP and CPI forecasts for 2025 to be revised upward, but the risk balance is more important. In the previous report, the economic outlook was judged to scoot to downside, while the price outlook was said to be generally balanced. So, we will be watching for any changes in these assessments. Third is the governance press conference. Whether it stands on assessing the U.S. economy and the effects of tariffs, we believe our cautious stance will be maintained. The reasons are the BOJ's core members' communication in October, reflecting the Tangkang Regional Branch Managers' Meeting emphasised that the data are not yet sufficient, and that with the U.S. government shutdown limiting the availability of updated data. Yeah, understood. Nazaki-san, thanks so much. It was great to get you on the podcast. Thank you so much. Now, across the broader Asia region, I see three things I'd really like to shine a little spotlight on this week, so let's just run through these quickly. First up, China. October PMI data will be released next week. Our team in China expect the official manufacturing PMI to remain weak at 49.8. That's unchanged from September, but still a little below the neutral 50 level. We've had wins from infrastructure investment in the property sector, and they have the official non-manufacturing PMI sitting at 50. That's also unchanged from the prior month. The team there noting lackluster spending during the Golding Week, holiday period in particular. And with that, our China team's caution on China growth momentum continues. Second, South Korea Q3 GDP data will be released. We expect some better news there. We have growth forecast at 1% quarter on quarter in Q3. That's up from 0.7 in Q2. And the team are noting a gradual recovery in domestic demand and continuing solid export growth. And finally, Australia, my neck of the woods, Q3 CPI data will be released. And I think this one's important. We have the headline inflation rate rising by an uncomfortably high 1.2% quarter on quarter with a trimmed mean underlying measure rising by 1% quarter on quarter. Headline inflation will be boosted by some volatile items, but underlying and server sector prices look to have been uncomfortably high in Q3 too, and notably higher than the RBA had been forecasting. So despite a recent jump in unemployment in Australia, which may or may not represent noise in the data, and we think the RBA will most likely keep cash rates unchanged in November, should that inflation forecast prove close to the mark. Okay, so there you have it, our views on major market themes and what to look out for next week. This podcast has been written by Andrew Teisest and the global markets research team and expertly edited and produced as always by John Dalton. Thank you for listening in. If you did enjoy this podcast or would like to hear more, please like and subscribe to Nomura's podcasts on Apple, Spotify and SoundCloud or wherever you get your podcasts. 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