The Week Ahead - Mon Dieu!

AI Boeing is a new frontier with SpaceX looking to raise 40 billion dollars to buy Nvidia chips. Oil gains as Iran steps up its attacks on shipping in the strait. And French Bond futures fall after yesterday's rally as investors remain on edge. Hello and welcome to the week ahead on Nomura Podcasts. I'm your host, Andrew Tyson, from our Global Markets Research team. And today's Friday, the 9th of October. Well, there was a snippet there from Tom McKenzie from Bloomberg News. I thought he touched on some of the biggest themes for global macro and markets. Quite nicely. The AI build out is exciting, but it does require a lot of debt funding. The hyper-scale is a nodding, tristrate-sensitive given their potential upside. But that is adding to pressure on sovereign bond markets, where higher borrowing costs are a much bigger deal. And the spotlight has turned to France and Peru for all Europe over the last week or two, where yields have risen and spreads have widened sharply. Meanwhile, oil prices remain elevated with no clear path towards resolution in the Middle East, and with reports of more Iranian attacks on tankers. And President Trump reportedly saying he's not so interested in doing a deal. All these forces are continuing to put upward pressure on bond yields. This has supported the US dollar, but despite some risk wobbles, the S&P did climb the wall of warry to post another fresh record high earlier this week. So this week on the podcast, we're going to mix it up a little and start in France, a special guest, Myruma Zé. Nomura's rate strategist based in the thick of things in Paris will be joining us to help take us through what's going on in the bond market there, why it matters, and what might come next. We'll also check in with Jeremy Schwartz, Nomura's senior US economist in New York, and there's no shortage of things to discuss there in terms of growth, inflation, and the Fed. With some important data out there next week too. And finally, we'll go to India to examine this week's rate hike by the Reserve Bank there and the Outlook, and some of the key things to look out for across the broader Asia region next week. And finally, I'll end with a few words on Australia where the growth in RBA rate cycle is looking almost too interesting and where risks are likely rising. There is certainly much to discuss, but before we kick off, we have some exciting news to share too. I hear at Nomura, we're launching a brand new podcast called Understanding Japan. If you've ever wanted a deeper dive into the forces, innovations, and policies shaping Japan's economy, this 10-minute monthly podcast could be the one for you. Tune in from Tuesday 13 October via your usual podcast provider. Now, with all that said, let's dive in. Okay, so starting in France, I'm really delighted to welcome to the podcast, Special Guest, Maureen Mazet, from our European rate strategy team. I should note up front that Maureen is part of Nomura's strategy team, not part of the global research team and what you'll be hearing here is certainly not investment advice, but I think it's super helpful really to chat with someone on the ground in Paris to help unpack what's been going on there in French and European bond markets. So Maureen, welcome. Thank you. Thank you for having me. Excellent. Look, let's start by setting the stage. Can you explain what's been going on? Why have French bond spreads widened? What was the trigger here? The trigger is all about the flows. So if I can give you a bit of context, doing the summer, or it is started to underperform, although this is a period where we usually see a bit of appetite because people are doing carry trades. So that was for me the first sign of a bias strike. That is, that the pool of investor ready to buy the dip is shrinking ahead of the elections. Then we had this global bond sale off until in September, which emphasized the weakness of debt dynamics. In general, I think it was a global concern, but it definitely, I lighted the weakest link in Europe, which is France. And that led to subsequent wave of structural selling. And most importantly, hedge funds leveraging on the front end, which is really the bulk of the aggressive move that we've seen in spread, not only in France, but also in other markets and in other countries. Okay. Got it. So yes, I guess, of course, higher bond yields are an issue for many countries, but particularly the vulnerable ones like France where debt levels are already quite high. Hey, I'm just on that. What's the evidence in terms of contagion to other markets are there other countries here that are looking a bit vulnerable to? So the contagion that we've seen is really cross market. We can see that the French credit was hit in particular financials, and also think that the CAC and the performed all the European equities indices. But if I go back to the fixed income market, there was obviously some spillover onto other EGBs like Italy and Belgium, because they also have some debt issues. So spillover is definitely here. I think it makes sense. And if the widening extend, I would expect the sensibility of all the EGBs to remain broadly the same. Okay, got it. And look, I guess this is becoming quite a big issue. Have we seen anything in terms of central bank or government commentary? Could there be some sort of possible response from officials? So the way I read all ECB speeches or statements so far is that they're not here to close spreads. And effectively, it feels to me like the bar for an ECB intervention is much higher than what the single O80 boom spread would suggest. For the ECB, the first line of defense is fewer rate hikes. And that's what the market is playing for. Second line of defense will be halving or posing QT and potentially tweaking reinvestment towards France. And the third line of defense will be a TPI, which is an anti-fragmentation tool. Now, given France has no fiscal credibility, the political bar to activate the second and third line of defense is quite high. So to answer really your question is, no, we don't expect the ECB to intervene. And that communication has been in line with that. Okay, so that's interesting. Yes, central bank is saying they're not here to close spreads. That's quite a strong comment. I guess, you know, sensible from first principles, you know, that would involve moral hazard. But I guess there are risks on the other side if policy makers continue to sit on their hands. Yeah, and thank you for mentioning that TPI, the transmission protection instrument. Yeah, I think there's a high hurdle for that one. I believe if they need to see the ECB needs to see disorderly or unwarranted market moves before they trigger that. And yeah, I guess we haven't quite seen that yet. Hey, Marin, final question for you. And this is possibly the toughest one. I'm sorry. But going ahead, do you have a view or what should we be looking out for as we keep an eye on developments here? So as I said, it's all about the flows for now. So what we should monitor from here are OAT auctions until you rent. The DMO still has 50 billion to issue. And I expect them to listen carefully to deal with recommendations. We also have the budget process until at least mid-November. So that would be in focus. Obviously, the situation is very fluid. I feel like we could have a respite before you rent if the budget is voted. And that can bring a bit of support from domestic. And that can help tighten the spread a bit. But we definitely won't go back to where we were before. And then in 2007, I think it's a whole different story because we will have a supply wave as we usually have at the beginning of the year. Domestic won't be in a hurry to step in. And we have the obviously elections, which tells me that the worst for OAT is probably not behind us. Okay, got it. Hey Marim, this has just been so valuable. Such a big issue. This has become in markets. Really appreciate you taking the time to come on the pod and have a chat with us. Thanks again. Thank you. Now let's jump across the Atlantic and check in with Aichi Amamiya, senior U.S. economist in New York, in our research team there. Aichi, you're welcome and thanks for coming on the pod. Thank you very much for having me, Andrew. Excellent. Now there's a lot to discuss in the U.S., as is often the case. But in my head, I've got this centered around three things, inflation growth and the Fed. So let's run in that order. On the inflation front, CPI and PPI data are out next week. Can you share some thoughts on that? And how do you say those numbers, tracking through to the core PCA measure? Sure. So the next week is inflation week. So the most important piece is a month-a-month core CPI. So our forecast for that component is 0.2 to 7 percent month-a-month or 0.2 percent after rounding, which is a small moderation from 0.3 percent in the previous month. So the last month was boosted by idiosyncratic increase in a wireless token component, which jumped by more than 5 percent. But we saw that as being one-off phenomenon. So as that temporary boost waned, we expect some more trend-like increase in a monthly monthly CPI inflation, which is our forecast is again 0.2 to 7 percent month-long months. And then based on our forecast for CPI and PPI, our forecast for month-long months, September core PC inflation is 0.202 percent or 0.2 percent month-long months, which is also a small moderation from the August reading of 0.2 for 7 percent, roughly speaking, five basis points down from the previous month. So I think, given that, you know, our forecast, you know, the Fed doesn't need to rush to raise rates at October from same meeting. But that being said, based on our monthly core PC inflation forecast, year-over core PC inflation will likely remain at the roughly speaking, 3 percent, essentially unchanged from a previous month. So policy makers still remain, will likely remain a vigilant on inflation risks, you know, remain uncomfortable with, you know, the elevated inflation, to that by which means that, you know, policy makers will likely expect another rate hike by the year end by the not October meeting. So which is consistent, our Fed call of October pose, followed by one more hike in December. Okay, that's very clear. Thank you. And yes, switching from inflation to growth through CalSales data will also be out next week. I think we all know that consumer spending is a big component of GDP. So this is a fairly important release. What are you looking for there? So on the retail sales, our forecast is 0.3 percent increase. So in an excluding volatile components, control group of retail sales, they likely rose also by a 0.3 percent month to month in September. So the retail sales showed some, you know, the surprisingly strong, the strength in October. So sorry, August. So the retail sales was strong in August. So we expect some sort of, you know, small negative payback in September, but still we expect the positive growth in September. So consumer residents, residents, they continued into the September, but a piece of increase was a little bit slower than in August. So that's our forecast. So probably the implication for the Q3 GDP tracking is limited, if our forecast is correct. So which means that we are expecting some, you know, pretty strong GDP growth for Q3 as a whole. And then also the industry production, we are expecting some positive point, 0.4 percent growth in the production, which is, you know, positive payback from a front reading in August. Okay. Got it. Yeah. So some pretty respectable growth momentum there, still in the US. I remember Q2 GDP was revised up, and you're saying Q3 is pretty solid too. Hey, let's just finish with a Fed. And you did mention them a bit earlier. There's been a lot of Fed speak out lately, including Waller and Bowman. And we've got Fed share Powell on a doing a fireside chat, I believe, before the Fed moves into Black House. Have you been surprised by any of the sort of Fed communication, or are you sort of hearing what you are expecting to hear? So yeah. So actually, we heard some coordinated communications from key, if we can see, participants over the past week. So Vice Chair Jefferson, New York Fed president Williams, and Governor Waller. So equal to same message, which is basically pushing back against an October hike. But, you know, however, however, maintain, you know, medium-term monetary policy outlook of additional hikes. So that means that, you know, some day, you know, basically shared some strong consensus of October skip for all by another rate hike in December. So that is surprising in a sense that Chair Warsh, you know, does not believe in the benefit of what a guy does, right? So however, you know, it's pretty, pretty tough to win markets off the Fed speak of what a guy does. So actually, you know, the basically, and also given the proximity of October meeting to the mid-term election. So market needed to hear clear guidance on October from the meeting. So key members, you know, gave some hint over guidance to the markets about October from the meeting, but we haven't heard anything from the Chair Warsh, you know, especially about the full guidance. And then it's interesting to hear the Chair Warsh's comment next week. So his fireside chat is happening on October 15, which is a two days prior to the beginning of Fedos, the Blackout period applied to the October FMC meeting. So that should be the last word from the FMC participants. So it's interesting to see his message itself on the near-term market post outlook, as well as Fedos communication. Okay, excellent. Aichi, thanks so much. Let's end it there. No problem. Thank you very much. Now let's move to Asia and get the latest from Surnal Vama, numerous chief economists for Asia, extra pen. Hey, Surnal, thanks for stepping up again. Hey, Andrew, glad to be here. Good, good. Thank you. Look, let's start with India. We had a right hike from the Reserve Bank there this week. And inflation data is coming out in India next week. Can you share some thoughts? Yeah, Andrew. So RBI was a hawkish hike, but neutral talk. So hawkish hike, we did get a 25 basis point as expected, but this surprised us with a change in stance from neutral to calibrated tightening, plus the growth inflation projections were also revised higher. So that was the hawkish bit. But this was countered by some neutral talk. So they essentially explained that the stance change means that rate cuts are off the table, which of course, you know, is not a surprise. And that future path remains data dependent and it's not on a preset course. We also did not get any liquidity tightening measures that we were expecting. So it was mixed in that sense. So yeah, CPA inflation data will be important. We are expecting a fairly sharp jump from 4.8 to 5.8 percent. This reflects higher food prices plus the adverse base effects. Core inflation, we think, will be unchanged at 4.2 percent. So we think pass through will be quite limited. So you know, after the RBI meeting, consensus has shifted to 75 to 100 basis point in terms of cumulative hikes in this cycle. Our view is it's still a cumulative 50 basis point worth of hikes because we are seeing limited signs of inflation generalization and we also expect softer growth signals by first quarter next year. So we do think that too many rate hikes are priced in for India. Okay, good one. Yeah, now interesting to say we're a little bit different to consensus on that one. Hey, let's move to the other very large country in the region China. There's some data coming out next week as well. That's right. We have the inflation and trade data coming out there. So on inflation, we think the data should still show benign price pressures. So CPI, we are expecting a slight pick up to 0.9 percent from 0.8 percent. And PP inflation, we think, will pick up a bit more from 3.8 to 4.3 percent mainly because of higher oil prices. On the trade front, we are looking for robust export and import data. Both we think will be supported by chip price effects. One thing we'll be watching is how China's oil import data play out. That is, of course, very important from global oil price dynamics perspective. And we think the trade surplus will widen to $121 billion from $119 billion. So that remains in a big surplus. Okay, good one. Yeah, so still not too much inflation in China. I know our team have a pretty cautious outlook there for growth and domestic demand in particular. So I guess that makes sense. Look, we'd better have a quick look at Singapore. One of the few central banks out next week, monetary authority of Singapore will be meeting. Could we say a policy change there? Yeah, we are expecting another effects policy tightening by the MS. Growth momentum remains quite strong. And core inflation is also said to rise quite sharply. Actually, the question is whether it will be a slight or a very slight slope increase. Our view is a slight slope increase by 0.5 percentage points is more likely given the strong macro outlook. Okay, good one. And look, finally, so I thought we'd step back and look at a big picture issue. Let's look across the whole region. I know Namur as latest Asia economic monthly was out earlier today and you've penned a pretty neat cover letter. Can you take us through what you went through there? Yeah, sure. So, you know, the question we're asking is is inflation generalizing in Asia? And it's an important question because whether central banks do a smaller policy recalibration or a steeper policy tightening cycle to curb inflation risk is going to be dependent on the answer to this question. So, our analysis basically shows that we are seeing early signs of inflation generalization. A lot of this is because of the indirect effects of the supply side shocks. So, our Asia inflation generalization index that's risen from 97.1 in March to 102 in August. What's interesting is the rise is actually less than what we had seen in 2022 after the Russia Ukraine war. And this is true across all economies, but there are important divergences within Asia. So, the highest sort of price pressure in terms of generalization we are seeing right now is in Taiwan and also in Philippines. The medium pressure economies are Singapore, Korea and Thailand and the lowest pressure economies are India, Indonesia and Malaysia. And when we compare this pressure to policy rates, so the inflation generalization pressure versus policy rates, it does help answer the question of whether it's going to be recalibration or a steeper tightening across countries. And numerous clients, of course, can check out the report for more details and answer to this question. Yeah, I thank you so much for covering that. Yeah, and I thought that was really interesting analysis and something with policy and potential market implications. Yeah, so thanks for taking us through that. Hey, let's end it there. Thanks so much. Thanks very much, Andrew. And finally, I'm going to win votes because privilege here and just share a few quick thought on Australia where I sit and where things are interesting and where I think also risks arising. Next week, we have RBA meeting minutes and a fresh RBA annual report to look out for. Those minutes will highlight that the RBA did indeed deliver a fourth rate hike at its policy meeting two weeks ago in the unanimous decision. But the governor also noted at that post meeting press conference there that the board did consider the case to not hike. So I'll be looking to the minutes to see how serious that discussion was. The RBA's annual report will also show details of its FX reserve holdings. Last year, this showed reduced US dollar exposure and increased Euro exposure. So I'll be looking to see if any further changes are revealed there. We'll also receive the September Label Force report and respect flat job growth in Australia in September after solid rise in August, likely influenced by the earlier national census. And with the unemployment rate holding steady at 4.6% and the participation rate likely dipping back a fraction. And more broadly, we see the Australian economy softening following four rate hikes this year and tax changes which have made it less attracted for investors to buy existing dwelling. We think the RBA rate hike cycle is most likely over in contrast to other central banks like the Fed and the ECB. And we forecast sub-trained growth and rate cuts in the second half of 2027. So Australia's macro and rate cycle is looking a little different from many others in our view. Okay, so there you have it. Our views on key developments, major market themes and what to look out for next week. This podcast has been written by Andrew Tyshurst and the Global Markets Research Team and 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 numerous podcasts on Apple, Spotify and SoundCloud or wherever you get your podcasts. And if you have a moment, please leave us a review and as we always say, it would make our day if you could press the few buttons and share this podcast with a colleague or a friend. For more, log into namuraconnects.com to keep up to date and to keep on listening. Thanks good bye for now and see you next week. In a complex and unpredictable world, whereas some set in one market means a sunrise in another, one investment bank always looks beyond the horizon to help our clients release the potential of tomorrow today. Namura connecting markets east and west. Disclaimer, this content has been prepared by numerous solely for information purposes. 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