Market Risk Appetite Cools

• China’s top economic planner failed to deliver on expectations for additional stimulus measures.

• Fed officials are pushing back against additional jumbo rate cuts.

• The RBA September meeting minutes points to a dovish shift.

Risk-off sentiment has gripped financial markets. U.S./European equity futures are down, and the dollar is mixed near recent highs. The safe haven JPY and CHF are outperforming while most growth-sensitive currencies are underperforming after China’s top economic planner failed to deliver on expectations for additional stimulus measures.

In our view, absent the real danger of a full-blown war between Iran and Israel, the global macro backdrop remains favorable for risk assets. China has turned-on the policy tap, and the Fed is dovish while the U.S. economy is strong.

Fed officials are pushing back against additional jumbo rate cuts which is USD supportive. New York Fed President John Williams cautioned the 50 bp rate cut in September was not “the rule of how we act in the future”. Williams added “the current stance of monetary policy was well positioned to both hopefully keep maintaining the strength that we have in the economy and the labour market, but also continuing to see that inflation comes back to 2 per cent.” Meanwhile, St. Louis Fed President Alberto Musalem (2025 voter) views “the costs of easing too much too soon as greater than the costs of easing too little too late.”

The U.S. September small business optimism index (11:00am London) and August trade balance (1:30pm London) are today’s data highlights. Fed speakers include Bostic (voter) and Collins (2025 voter).

EUR/GBP is edging higher on risk aversion. However, relative monetary policy trend between the ECB and BOE still favors a lower EUR/GBP. The pick-up in UK leading economic indicators and sticky service price inflation suggest the threshold for an aggressive BOE easing cycle is high. Indeed, The U.K. BRC same store retail sales were better than expected. The value of same store sales increased 1.7% y/y in September (consensus: 0.8%), after rising 0.8% in August and the fastest pace since March. A recovery in non-food sales, notably clothing, boosted spending last month.

U.K.-German 10-year government bond yield spreads widened to the highest level since August 2023. Investors fear the U.K. Labour government will fund increased investment with higher debt issuance rather than tax hikes. This is a risk to our constructive GBP view. Chancellor of the Exchequer Rachel Reeves will present the budget on October 30.

SEK ignored ongoing disinflationary pressures in Sweden. In September, the policy relevant CPIF matched consensus and eased one tick to 1.1% y/y while CPIF Ex-energy dropped two ticks to 2.0% y/y (consensus: 1.9%), lowest rate since December 2021. The market is pricing in about 150 bp of total easing over the next 12 months that would see the policy rate bottom near 1.75%, which is lower than the Riksbank’s 2.25% forecast. Unless inflation cools more than expected, there is room for interest rate futures to converge towards the Riksbank’s policy rate forecast.

Japan’s soft wage data supports a loose for longer Bank of Japan policy stance and is a drag for JPY. Nominal cash earnings growth slowed to 3% y/y in August (consensus: 2.9%) vs. 3.4% in July. The less volatile scheduled pay growth for full-time workers eased to 2.9% y/y (consensus: 3%) from a series high of 3% in July, while real cash earnings fell -0.6% m/m (consensus: -0.5%) after rising 0.3% in July.

Nevertheless, Japan’s large current account surplus offers JPY support during periods of heightened risk aversion. The adjusted current account surplus rose to a record high of ¥3,016.5bn in August from ¥2,802.9bn in July. Annually, the current account surplus totaled ¥27,075bn or 4.5% of GDP, slightly below the series high of 4.6% of GDP in Q4 2007.

AUD is underperforming. The RBA September meeting minutes points to a dovish shift. The minutes scrapped the August meeting minutes guidance that “it was unlikely that the cash rate target would be reduced in the short term.” Of note, RBA Deputy Governor Andrew Hauser rejected the “dovish” description of the RBA September meeting minutes noting that the bank’s job of bringing down inflation is “not done yet”. Regardless, we expect the RBA to join the global easing cycle later this year because Australia underlying economic activity is weak and indicative of lower inflation pressures. RBA cash rate futures price-in less than 50% odds of a 25 bp cut by December.

NZD is heavy ahead of tomorrow’s RBNZ policy rate decision (2:00am London) The RBNZ is expected to slash the Official Cash Rate (OCR) 50 bp to 4.75% following a 25 bp cut in August. The swaps market implies 80% odds of a 50 bp rate reduction. The RBNZ needs to crank-up easing because policy is too tight, heightening the risk a deeper economic downturn. The OCR is well above the RBNZ’s estimate for the nominal neutral rate range of 2 and 4%. There is no media conference or updated macroeconomic projections at this meeting.