Better risk sentiment on US-China deal expectations

USD: Inflation more mixed as trade optimism picks up

The US dollar is marginally weaker at the start of a new week with the focus very much on Asia with President Trump at the ASEAN summit before a visit to Japan from today through Wednesday. The visit of Trump to Asia follows the US inflation data on Friday that has reinforced expectations of a rate cut at this week’s FOMC meeting. The data continued to illustrate upward inflation pressure on goods but this was offset by slowing services inflation, in particular in rents. So the data we believe is good enough to justify a cut this week but it will equally leave some FOMC members nervous over the clear evidence of the impact from Trump’s tariffs.

But the prospect of a cut has helped risk sentiment, which is being reinforced today by the comments suggesting a trade deal will get done between the US and China, along with numerous deals improving trade deals with other Asian countries. Asian equities are all higher as are the Euro Stoxx and S&P futures. The Nikkei 225 is up 2.5%, and through the 50,000-level for the first time. Trade negotiators from China and the US stated yesterday that deals had been reached on tariffs, shipping fees, fentanyl and export controls. If a deal has been reached on fentanyl it could mean that there is more than a suspension with tariff left at current levels – we may in fact see a reduction of the 20% fentanyl-related tariff. It has also been reported that the Chinese want to seek protection from future uncertainties with a commitment to using the economic consultation mechanism rather than US trade policies being announced independently, like with export controls. If that was also achieved it would have a further positive impact in providing greater confidence of a period of stability ahead.

Expectations of a more substantial trade deal has helped lift CNY as well – the PBoC today set the daily fix at the strongest level since October last year (7.0881) and some 0.4% stronger than the market consensus. If a deal is done based on today’s reported details, the CNY has scope for further gains. The CFETS RMB Index has advanced recently in line with the recovery of the US dollar and is in fact marginally stronger today than its average over the last decade. Better risk conditions and some improvement in global growth expectations should result in the US dollar weakening as investors look at better prospects for non-dollar currencies. Presidents Trump and Xi will meet on Thursday in South Korea when we should get clarification of the how all-encompassing the deal will be.

CORE GOODS INFLATION OFFSET BY SLOWING CORE SERVICES INFLATION

Source: Bloomberg, Macrobond & MUFG GMR

EUR: France back in focus ahead of ECB meeting

Closer to home, France has come back into focus a little more quickly than some may have assumed. The failure of two no-confidence motions brought an end to the fears of an imminent collapse in the government but the French socialists are not happy and the suspension of pension reform through to the presidential election in April 2027 has not been enough to appease them. The demand for the budget to include some form of wealth tax to redistribute revenues to the less well-off has come to a head and there is a risk of the socialists tabling another no-confidence motion. Without the support from the socialists, a no-confidence motion would likely prove successful given both the hard-left (Unbowed) and the far-right (RN) were the instigators of the previous two no-confidence motions that failed. An amendment to the budget bill on introducing a wealth tax the Socialists added is expected to be voted on later this week.

Olivier Faure on Friday stated that the budget needed to include taxation on the “ultra-rich and mega-inheritances” and that if there was no progress by Monday, “it will be over”. The OAT/Bund yield spread widened a touch on Friday, closing back above the 80-level. PM Lecornu has criticised the action stating that one party alone cannot make demands and the correct procedures for debate, discussion and compromise needed to be pursued in order for an agreement to be reached. Given Unbowed and RN already want to bring down the government, that seems unlikely.

What we do know at this point is that the political uncertainty is doing damage. The data on Friday from France was poor. The advance Composite PMI in France fell from 48.1 to 46.8 in September, the weakest reading since February. The drop in France was in contrast to the reading for the euro-zone as a whole, which jumped from 51.2 to 52.2, the highest reading since May 2024 underlining the divergence in performance between France and the rest of the region.

Depending on developments in the early part of the week, there’s a chance that French politics could be a focus by the time of the ECB meeting on Thursday. The meeting is likely to be straight-forward and a bit of a non-event. We covered this in a preview published on Friday (here). Our key view is that we believe the ECB will repeat its message that policy is in a “good place” with inflation at around target and the policy stance at around neutral. We still believe the ECB will cut in the first half of next year based on lower energy prices, slowing wage growth and a strengthening currency.

Of course we have to admit our conviction on our EUR bullish view has fallen somewhat and a further break lower this week in EUR/USD will make our 1.2000 forecast for year-end more difficult to achieve. We continue to view around the 100-level in DXY and more specifically after that the 100.257 high in early August as key levels and if those levels hold then the technical picture remains conducive to a weaker dollar going forward. Another round of parliamentary elections could certainly threaten those DXY levels and hence political developments this week will be important along with the FOMC, BoJ and ECB meetings.

FRANCE ADVANCE PMI DIVERGES NOTABLY FROM THE REST OF EURO AREA

Source: Bloomberg & Macrobond

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com