U.S. government shut down
Republican and Democrat lawmakers have failed to agree on a deal on how the government should be funded for the upcoming fiscal year, which has led to a suspension of some government services and 750,000 federal employees put on unpaid leave. For a new bill to pass in the Senate, 60% of votes are required, which means there will need to be some cross-party support.
What are we monitoring?
The potential economic impact. Similar historical episodes provide a useful guide, with previous shutdowns suggesting that the permanent economic drag is limited, even if the shutdown lasts for a month (figure 1). This has been reflected in the asset price reaction so far, with moves in U.S. equities, U.S. equity volatility, bonds, and the U.S. dollar all relatively limited. Gold has been a notable beneficiary with the gold price at $4,065 (8 Oct).
Shift in Japanese policy direction
Japan's political transition marks a shift in policy direction. The Liberal Democratic Party's selection of Sanae Takaichi as leader introduces a platform that favors fiscal expansion and resists premature monetary tightening. Markets have repriced their outlook for the Bank of Japan's rate path a little lower, with the yen weakening, and long-end government bond yields rising.
What are we monitoring?
First, Takaichi's pro-growth stance may support domestic risk assets, particularly equities and infrastructure-linked sectors. Second, with inflation running above target, an acceleration in fiscal stimulus may still require higher interest rates, which would attract capital inflows, and support the yen.
Political instability in France
France continues to grapple with political instability. Prime Minister Sébastien Lecornu's resignation - less than a month into his tenure - underscores the institutional instability facing President Macron's administration. With no clear parliamentary majority, Macron must choose between dissolving parliament or negotiating a fragile coalition. Investors have responded by pricing-in a higher French government bond yield spread over German bonds, reflecting concerns over the future management of France's high government deficit.
What are we monitoring?
French budget negotiations – we expect France's bond risk premium to rise further.
European Commission import policy changes
The European Commission has proposed significant changes to its steel import policy, cutting tariff-free quotas and raising duties to 50% on excess volumes.
What are we monitoring?
The ripple effects from US protectionist policy on other countries, e.g., countries protecting themselves from global overcapacity, new industrial strategies, etc.
