By Enrique Diaz-Alvarez, Chief Financial Risk Officer at international payments company Ebury

The absence of macroeconomic news caused by the US federal government shutdown is creating strange correlations in financial markets. Last week, investors turned to traditional safe havens such as the gold and the swiss francwhile stocks maintained their all-time highs. At the same time, bonds and the euro moved in a narrow range, generally staying within recent limits. To make the interpretation of events even more difficult, there have been some concerns about the quality of credit in the US after some loud “cannons”, although spreads remain very low in absolute terms. Emerging market currencies were broadly higher, although moves were limited and difficult to interpret.

The lack of data in US economic data due to the government shutdown will ease somewhat this week with the release of September’s CPI inflation report on Friday to allow for adjustments to Social Security pensions. Economists still expect a monthly run of between 3% and 4%, well above the Federal Reserve’s target and in apparent contrast to the central bank’s increasingly dovish stance. September inflation data will also be released in the UK on Wednesday. Friday promises to be a particularly volatile day: in addition to the US inflation report, PM indicators of business activity in October will also be released worldwide.

Sterling

UK labor market data continues to show a gradual easing, with minimal job creation but no sign of significant losses. This is in line with monthly GDP figures, which continue to show an economy growing at a mild pace of around 1%. The Bank of England is increasingly facing a dilemma similar to that of the Federal Reserve, as labor market weakness coexists with inflation that remains well above targets. This year’s inflation data is key to the next steps in interest rates. The Bank of England appears to be in no mood for a full round of easing as long as inflation remains closer to 4% than the central bank’s 2% target.

Euro

The French government appeared to secure a temporary reprieve in parliament last week, but market relief was tempered by the fact that it came in exchange for abandoning modest pension reform plans. French government debt suffered an unexpected downgrade over the weekend, but early signs from Asian markets suggest investors are largely ignoring it. Having just completed its easing cycle, the ECB now appears to have an easier mission than the Bank of England or the Federal Reserve. However, the upward revision of structural inflation in the euro area last week is a reminder that the threshold for further reductions remains very high.

US dollar

The lack of economic data, resulting from the US government shutdown, is causing the market to over-interpret other developments, such as recent problems in the US private credit sector. So far no systemic effects can be discerned from these individual incidents. The macroeconomic environment (monetary easing despite high inflation) should theoretically be conducive to credit, however we are monitoring the situation closely. We expect late inflation data this Friday to show no further progress towards the Fed’s target, with headline and core inflation both in the 3%-4% y/y range. None of this looks likely to prevent the Fed from cutting interest rates at both of its next two meetings, especially given the uncertainty caused by the absence of new labor market data.