The Week Ahead – Raw Deal on Rare Earths

We want to help China, not hurt it. If some in the Chinese government want to slow down the global economy through disappointing actions and through an economic coercion, the Chinese economy will be hurt the most and make no mistake. This is China versus the world. Hello and welcome to the Week Ahead on the Mora Podcast. My name is Dominic Bunning, head of G10FX Strategy at the Mora and today is Friday, the 17th of October. Well trade tensions have returned to the spotlight with another ramping up between Washington and Beijing as highlighted by the comments you just heard from US Treasury Secretary Scott Besant on the 15th of October. Late last week President Trump threatened to cancel an upcoming trip to China and raised tariffs significantly in response to China tightening export controls over certain rare earth metals. Although there has been some walk back on the most acute of these threats during the week, markets remain pretty feeble and awaiting further news on whether we will see escalation or a softening in tone from here. We'll speak to Jing Wang from our China economics team and Jeremy Schwartz from our US economics team to hear about what lies ahead in this debate as well as what the economic impact will be from both sides. Politics also remains front and center in Japan with negotiations ongoing between the LDP party's new leader and various potential coalition partners, head of a likely vote on who will be named Prime Minister early next week. My colleague Yajara Goto joins us from Japan to outline the latest developments there and the parts ahead. In Europe, politics has taken a backseat as French Prime Minister Sebastian Le Corneux survived a vote of no confidence, but the UK remains in focus, head of two significant November risks that are coming into view. Our chief European economist George Buckley will tell us how to view these catalysts in light of the latest and the incoming data. In markets, trade tensions seem to have had a more lasting impact on rates rather than equities with stocks moving back towards their highs as we speak, but yields remain fairly grounded after falling in the early stage of the week, helped somewhat by dovish comments from Fed Chair Jerome Powell earlier this week. In FX, the dollar softened again after a month of gains, but ultimately, most currencies remain frustratingly range bound, although gold does continue to surge higher. That said, any of the Applebench events could have a much bigger influence and a more directional force in the week and months ahead, so without further ado, let's get stuck in. We're going to start this week in Japan where political developments remain front and centre. I'm joined by our head of Japan FX strategy, Ujara Goto from Tokyo. Goto-san, thank you very much for joining us today. Let's just start with the current state of play. It's the LDP-elected Sanaitakichi in early October. What's actually happened in order to make political volatility much higher in Japan? Yes. Thank you very much. Basically, Takahichi-san's victory at the LDP board was quite a big surprise to the market, but we had another big surprise because a long-standing coalition partner, Kometo, actually decided to leave the ruling coalition. So the political stability has weakened, even though Takahichi-san had a quite surprising victory, and that is having some higher uncertainty on the Japan politics because, firstly, Takahichi-san may not be actually the next prime minister because the opposition, if unite, can actually have bigger sheets than the LDP alone, so uncertainty on the Japan politics increased last week after Kometo's surprising departure. Okay. So there's obviously a lot of potential possibilities now that that coalition has broken down. How do you think about the next steps? Who can Takahichi-san team up with? What are the options, and how likely are some of those? Is it very likely that LDP will still be in that coalition, or could we get some kind of combination of the opposition parties? Yes. So I think most likely scenario is actually LDP is going to form a coalition with a party called Japan Innovation Party, JIP. So surprisingly, JIP leader, we have joined leaders Fujita-san and Yoshimura-san. Those guys decided to have a formal coalition negotiation with LDP's Takahichi-san after summit meeting on Wednesday this week. And it's still uncertain whether these two parties can reach the agreement officially, but by 20th of October, next by next Monday, there'll be final kind of decision whether JIP is going to join a coalition with LDP or not. So that is quite important development to monitor from here. On the other hand, opposition parties, two other opposition parties called DPP and CDP. Those parties are also trying to have an agreement to form an opposition-led coalition. And there is still small possibility for three parties coalition among DPP, CDP, and JIP, but looks like now the chance is limited for opposition-led parties. And the main scenario is likely LDP and JIP is going to form a coalition next week. Great. Thanks very much for making it pretty clear, even though there's lots of permutations. Do you have any strong views on how the yen and Japanese assets maybe in general behave on some of these scenarios? What would be the sort of the best case scenario for the yen and what might be the most challenging scenario from a yen perspective? Yeah. So I think most likely scenario, again, a coalition between LDP and JIP, I think that scenario will have actually quite a limited impact on the Japan assets, including JPI. Because in this scenario, Takaji-san can be the next prime minister, but still a coalition doesn't have majority in both houses, upper and lower houses. So it's not easy for Takaji-san to pursue its aggressive easing policy in both fiscal and monetary policy. So the changes in economic policy will be limited in this main scenario in my view. So yen's reaction is likely to be limited. And the most positive scenario for a Japanese yen is actually opposition rate government in my view. Because one of the opposition parties, CDP, actually this party is the biggest party among opposition parties, but leader Noda is having quite a hawkish bias regarding the monetary policy advocating to correct and weakness by more aggressive BOJ normalization. So if CDP is joining the government in opposition-led coalition, I think monetary policy normalization can actually accelerate, which can support Japanese yen while this is at the moment kind of a terrorist scenario. And the negative scenario for yen is sudden flip for the LDP to form a coalition, not with JIP, but with DPP. Because DPP is having more dubious bias in fiscal and monetary policy. So in this scenario, I think Takaji-san can have more strong easing policy and may react negatively. But I think this is also at the moment not some in scenario, but a risk scenario. OK, brilliant. Very, very clear. Thank you, Goto-san. And just finally, what are the key dates to watch? Is it the 21st of October that we should get the extraordinary diet session, or is that not fully confirmed yet? Actually, not fully confirmed yet, but most likely, yes, we are going to have extraordinary diet session starting on the 21st of October. And again, as I mentioned before that, likely by the 20th of October, JIP is going to make a decision phase to form a coalition with LDP. So early next week, the 20th and the 21st are quite important dates to monitor for Japan politics. So just any development over the weekend will be quite important for these important dates on the 20th and the 21st. Brilliant. We'll all be watching and listening very, very closely. Thanks, Goto-san, for joining us and we'll speak to you soon. Thank you very much. Moving on from Japan, we're going to focus on China now, where politics in a slightly different form in terms of renewed trade tensions are also pretty key. Jing Wang from our economics team joins us this week. Thanks, Jing, for coming on. Can you just explain to us, you know, for those who maybe haven't been following headline by headline over the last couple of weeks, exactly what is the state of play in terms of U.S.-China trade? What's been the latest escalation and how do you sort of see that resolving on over the next few weeks? Okay. Yeah, sure. Thanks. Yeah, so on the U.S.-China tension re-excalation, you know, we already have so many headlines. I guess we don't have to go through all those details, policy actions, and countermeasures. But you know, from this renewed escalation, you know, that's, you know, just largely in line with our view, this confrontation between these two superpowers are, you know, inevitable. But in a very near term, we are not that pessimistic, and we expect both sides to make some concessions to ease the tension. And we believe the in-person meeting between President Xi and President Trump will still take place at the APEC summit at the end of this month. Why? You know, because we think U.S. and China are still, you know, heavily reliant on each other, and, you know, they may want to reduce, you know, such reliance, you know, for whatever reasons, but that will still need time to happen, right? So if we are going to have these three digitaries coming soon, that means embargo between two countries, and we don't think they can afford that to happen, and especially both countries are experiencing some sort of a growth slowdown at the current stage. And we have already seen the consequence of the three digit tariffs back in April and May, and we don't think they want to see that happen again at least in the very near term. So we expect another choose in the next few weeks between U.S. and China, and we think this kind of cycle, which is a tension, escalation, and a choose cycle, will become a new normal between these two countries. Okay, so it's going to be something we have to get used to over the coming years, just the ongoing back and forth. Well, clearly, these kind of developments must have some impact on economic activity. I mean, we've got the Q3GD pre-print coming out of China next week, and we've got the, I think, the fourth plenum as well. What are you guys expecting from that? Are we seeing any notable downside risks to growth, or is everything still kind of steady as she goes in China? Yeah, you know, as I mentioned about the U.S.-China tension, you know, economic slowdown is about what the factor impacts their current decision or negotiation. So next Monday, we will have the Q3GDB data. We expect the growth to slow to 4.5% year on year in Q3 from 5.2% in Q2, which is slightly below the market consensus of 4.7%. You know, if you look at those growth drivers, exports was quite resilient, right? In the latest September data, export growth accelerated to 8.3% year on year, and that's above market and our expectations. But if you look at other parts of the economy, we have seen very pronounced slowdown in investment and consumption, right? So, and I don't think the strengthening exports will be good enough to offset the headwinds and the slowdown in investment and consumption. So that's why we expect, you know, the growth to slow down from the first half on the Q2, and we think this slowdown will continue in Q4. Regarding other policy or political event, you know, we will have the fourth planning taking place next Monday as well, and it will last for four days. But this is more about non-term policy agenda because, you know, it's more about the economic agenda for the next five years, rather than short-term stimulus. So we think at this fourth plan, Beijing will continue to emphasize the importance of self-sufficiency in the tech sector, and they will pledge more investment, especially in those semiconductor sector and AI, because China is still facing these restrictions if no major other economies. At the same time, we don't think the government will announce the growth target for the next five years because of these heightened uncertainties, you know, especially on the geopolitical tension and the property fallout. But after the fourth plan and also perhaps after the Trump sheets are made, we think the policy effort may have to step up because the economic fundamentals remain quite weak, as I mentioned, right? The only growth driver in economy right now is exports, and it may slow as well as we're getting in the Q4. So we expect more policy effort after October, perhaps in November or in December, and the fiscal policy will be the focus rather than monetary. Okay, brilliant, Jing. Thank you very much. Lots to watch out for, I guess, then over the next week or so, growth, plenum, trade tensions, and we'll all be keeping our eyes firmly focused on all those stories. Thanks very much for your time. Thank you. Well, we can take a bit of a breather now away from politics as we head to Europe, with France's recent political turmoil seemingly receding with Sebastian Leconu finding a budget compromise with the socialists and avoiding losing a vote of their confidence. So that means we can focus a bit more on the data, and in particular, the UK data with George Buckley, our chief UK and European economist. George, thanks for joining us. Look, we're gradually closing in on the November Bank of England decision. We've got some key data coming up. We had some pretty important data last week as well in terms of the labor market with CPI to come next week. You guys have stuck with a call for a November rate cut. Can you explain what it is that's driving your view that the Bank of England is going to cut and how does this data that we're seeing at the moment keep that on track or not? Yeah, thanks, Dom. So we're in a position where the central bank is telling us that they think that interest rates are still restrictive, that they want to cut interest rates. This is not just the doves on the committee saying this. It's the entire committee who've agreed to this statement. So I think we can be reasonably confident that further cuts need to be delivered. It's just a question of timing. And I think we think they could continue to go and could go in November, but you need all of the data to be moving in the right direction or the wrong direction, which is weaker. So we've already had the labor market. As you said that was softer. We need to see some weaker CPI prints as well. They're probably going to go up in next week's prints. And that's largely, it's not because of what's happening right now. It's because of what's happening a year ago. It's more to do with base effects than anything else. But I think it'd be also helpful if we saw some softness in the PMIs as well. If we got all of those things, and I think the NPC could agree to cut interest rates again earlier than the market's thinking. And in terms of specifically on CPI, what kind of number would you need to see to feel more confident on that November rate cut? Well, we're looking for 4.1 next week on headline, but we're looking for 4.9 on services. It's still too high. I think we can safely say that. But the point here is that it's momentum, which is important. A bit tricky to decipher momentum in the UK CPI because it's not seasonally adjusted. So seasonal patterns change, and you need to look at the monthly changes in these numbers. It's not easy to decipher. But I think if there's any evidence at all that some of the underlying parts of services inflation, stripping out things like administered prices and airfares, which are super volatile, there's any evidence that this underlying rate of inflation of services inflation is beginning to slow. That's what they really need to look for in order to be confident in cutting interest rates again. Okay, brilliant. Thanks, George. So that's monetary policy done, Dusty. You know, fiscal policy is still pretty important, so we can't avoid politics completely in the UK. We're seeing a lot of headlines regarding the budget Rachel Reeves has been on the wires a lot recently. What's your latest thinking in terms of how much fiscal tightening is likely to be delivered? And how do you think that might be implemented? The ranges that we're currently seeing from various estimates, anywhere between about 20 billion of a fiscal whole to about 50 billion. So it's a pretty wide range. And some of that depends upon whether the forecaster in question is saying that they need to increase the amount of fiscal headroom because it's not very much at the moment. It's only 10 billion. And some are calling for that to be higher markets in particular, I think would welcome a larger number there. So that really is important. There's a big question about whether they tighten policy through tax increases or spending cuts. I think it's largely going to come through tax increases. They tend to have a smaller multiplier as well. So that might not have as big a negative impact on the economy than maybe cuts in investment spending. So I think to meet their fiscal rules, they need to do a lot. They need to raise taxes quite a bit. And of course, they've already told us there's a lot of taxes they don't really want to touch because their manifesto pledges that they weren't going to touch them could be increasingly difficult, the larger that fiscal whole, not to touch those taxes, things like income tax VAT and national insurance contributions and the triple lock and they ruled a heck of a lot out back in the manifesto. That's not to say that they won't rule it back in again. But I think they've got some very tough decisions to make. And I think one of the most important ones is to decide whether to do this upfront. So fiscal tightening in the near term. Big problem with that, of course, is that Rachel Reeves won't really want to have to do something which annoys her back benches straight away. Or whether you do something further ahead, the problem is with that is that the nearer you get to an election, the voters won't like it. So I think it's going to be a very, very difficult budget for her. Yeah. And we think a pretty difficult budget for Sterling for a lot of the reasons you kind of laid out there, quite hard to get the right balance of tightening, whether it's through tax increases or spending cuts and quite difficult to get the market on the side and feel credible that you're doing enough, doing it the right way without hurting growth in the short term. So we still think Sterling faces a few challenges there. We have got the PMIs. You mentioned them briefly earlier on, but Europe as a whole is seeing some PMIs. You've had some up momentum in some of the European data, gradual up momentum, I would say, over the last few months. What are you guys thinking on the PMIs that are released at the end of next week? We like the PMIs. They're a great survey. They're published across all countries and we can compare them quite nicely. They're better in Europe for tracking GDP if you think that's something that you'd like them to do. We're looking for a small increase and they have been increasing generally, but very modestly each month in Europe. They're still relatively low at around about the 51 mark. The UK a bit different. We have seen a sharp fall in the September PMI. We think there might be some rebound there, but generally speaking, all of the PMIs up a little bit, but still consistent with growth, which is fairly sluggish. Brilliant, George. We look forward to seeing that data when it comes out and seeing how it's going to impact everyone's views on the Bank of England, the budget, and all else markets related in the UK and Europe. Thanks very much. Thanks, Dom. Right here, right now, I am calling for the moderate Democrats to be heroes, be heroes and reopen the government for the American people. We're going to finish this week in the US where the government shutdown goes on despite Scott Besant's pleas that we just heard to the Democrats to end the shutdown. We've got Jeremy Schwartz on from our US economics team. Jeremy, thanks a lot for joining again. I feel like I ask this pretty much every time I have you on the podcast these days, but is this shutdown ever going to end? Hey, Dom. It's great to be back on the podcast. I should say there hasn't been a lot of progress on the shutdown in DC, which doesn't mean it can't be resolved quickly at some point. What we're missing, though, is a clear catalyst. I think one side starts to feel like the news cycle has turned against them when you maybe start to see some negative polling. There is a deal to be had, but for the time being, it remains a relatively distribution. It could end any day, but it could stretch on for a matter of weeks until you really start to get that pain building up for one side or another. I guess some of the political noise, maybe for Trump himself, is that the international news is getting a bit more prominent. We've obviously had the re-escalation of tariffs with China, or at least with trade tensions with China. We actually heard from Jing earlier giving his perspective on what it means from a China perspective. How do you see this playing out from the US side? I do note that you published a piece this week shifting your overall view about tariffs and the impact on the US, but how are you currently thinking about tariffs, trade policy? Is it going to be plain sailing from here? Or is there a bit more volatility to be had? Yes. I think a big difference between now and back in the trade tensions in Q2 in April, May, June was this time around, China really seems to be acting and the US is reacting. You saw the restrictions on exports of rare earth minerals and magnets from China, which really kicked off the other trade tensions last week. Trump responded to that in a very aggressive way, saying, "Okay, we are going to ramp up tariffs in response and maybe cancel a summit with President Xi." I saw the Treasury Secretary Besant and US Trade Representative Greer walk that back a bit over the weekend, but now some of the administration rhetoric seems to be ramping back up again with Besant talking about potentially decoupling from China. I think the US is still figuring out their strategy at this point. Again, there appeared to have been taken a bit off guard by some of the aggression coming out of China. We suspect a deal is the most likely outcome, but again, I think it's less of a coherent strategy for an administration that was never prone to be terribly coherent in the first place with some of these trade disputes. That said, coming back to the note that you mentioned, outside of China, US trade policy does appear to be easing across a couple of dimensions. We've seen some of the sector-specific tariffs, things on pharma and chips come out with much bigger exemptions than we had anticipated and that had been signaled by the administration. You also have the administration drawing up new lists of potentially exempted items, particularly focused on things that are not produced domestically and that might have large impacts for consumer price inflation. I think before the China news even hit, there were some signs that the trade war from the US side had reached a bit of a breaking point in terms of the amount of self-inflicted pain the administration was willing to tolerate. It looked like they were seeking out some avenues to ease up a little bit. Of course, China is a big complicating factor thrown into the mix. To your question, I think plain sailing is very unlikely. We think if the administration has their druthers, they'll probably continue to de-escalate rather than escalate, but given that China sees this as an opportunity to potentially exert some leverage, I would think the headlines remain quite noisy in the near term. Yeah, it makes a lot of sense, Jeremy. Thank you very much. Then just pulling it back, I guess, to the economy, we obviously haven't had a huge amount of data to go on, but we do get September CPI being released on Friday, the 24th of October, so a bit of a delay, but we will get the print nonetheless. What are we thinking in terms of inflation dynamics at the moment and also how does that play into our Fed call for the 29th of October? Yeah. We're expecting another strong reading for CPI. We think the goods price pressure is likely to continue. You maybe get a little bit of easing up on the services side, particularly from Shelter, which had surprisingly outperformed in the prior month, but I think unlike last month where you had a number of noisy components dragging down core PCE estimates, this time around, I think that's less likely to happen. So I think more of an unambiguous sign that inflation pressures are here to stay for the time being and risks being a more persistent issue into year end and the start of 2026. Coming back to the Fed, though, I think they have clearly let their guard down a bit on inflation. I think they're comfortable tolerating some continued inflation pressure as long as there aren't signs of acceleration or broadening out. So we saw a chair Powell earlier in the week pretty clearly indicates that October, still poised to cut. Governor Waller earlier today also suggested that a 25 basis point cut is more or less a given at this point. So we think that you're on a bit of a preset course for the time being, and the bar is quite high to talk them out of this gradual pace of insurance cuts. You know, somewhat separately from that, we're also getting some messaging that the end to QT may be coming sooner rather than later. Powell said that it might be appropriate to a wall and balance sheet rundown in coming months. That's the first time we've seen really explicit calendar-based guidance from a core Fed official. Waller followed that up by saying that they are effectively at the point where they've reached their target of an ample level of reserves. So, you know, while the October meeting might be a little bit early for them to kind of quickly pivot on balance sheet policy, I think the likelihood that you get an announcement ending QT in December has increased substantially. Brilliant. Thanks, Jeremy. I really appreciate that. And, you know, some of those slightly dovish factors, you know, do feed into our view that the dollar maybe has a little bit more weakness to come back in after strengthening over the last month. So a few things at play there that certainly could help our view, whether it's on the balance sheet or on the Fed side of things. As always, great to have you on and we'll speak to you soon. Thanks a lot. Yeah, great to be back. Well, that does it for this week. Thanks to all our contributors. Thanks to John Dalton, who edits and produces the podcast. And thank you to all of the listeners for joining us again. We would love to hear your feedback. So please do leave a review or comment and let us know what you like, what you want to hear more of and what we can do better. Please like and subscribe to numerous podcasts on Apple, Spotify, SoundCloud, or wherever it is. You get your podcasts and share this far and wide with anyone you think would find it interesting. 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