The Week Ahead - Blow Up? — The Week Ahead

PodcastThe Week AheadRaoul PalOct 2

The outlook spans U.S. inflation and monetary policy, with resilient labor-market measures keeping inflation risks in focus even as core PCE revisions offer a positive surprise. In Europe, proposed French deficit reduction faces parliamentary debate, while elevated inflation is expected to lead the ECB to hike in December and March. Across Asia, forecasts point to selective rate hikes and inflation pressures, while India’s energy and crop risks could affect its external balances and global food prices.

Inflation Monetary Policy Interest Rates Labor Market Fiscal Policy Emerging Markets

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Key Takeaways

The US economist says resilient underlying employment—a three-month payroll average of 51,000, still above the Fed’s breakeven estimate—will keep inflation risks in focus, even though revised core PCE was around 3% in July. The guest forecasts core PCE at 3% at year-end and expects the Fed to pause in October before a final hike in December, while noting that the October meeting’s proximity to the midterm elections could make some policymakers hesitant.

France’s proposed 2027 plan targets €54 billion in consolidation, about 60% through spending cuts, to bring the deficit to 5%; without intervention, the deficit is projected to reach 6.5% next year. French-German spreads peaked just above 150 basis points before ending at 140, while Italian and Spanish spreads also widened, and the guest says the ECB is unlikely to activate its backstop for French bonds because the pressure reflects France-specific conditions.

Despite French and broader euro-area bond-market and fiscal concerns, the guest expects the ECB to hike in December and March, citing its inflation mandate: September HICP rose to 3.8% year over year, substantially driven by vehicle fuel prices, while core inflation was lower but rising.

ECONOMY

Labor Resilience — The U.S. economist describes the labor market as resilient. Payroll gains missed consensus, but the three-month average was still 51,000, above the Fed’s estimate of breakeven employment. She argues that this underlying strength should keep the Fed focused on inflation risks.

“So broadly speaking, I think labor market is still resilient…”—

Core PCE Revisions — Annual revisions lowered core PCE inflation to around 3% in July from 3.34% previously. Much of the downward revision reflected methodological changes, including lower readings for portfolio management and investment advice prices. The guest forecasts core PCE at 3% at year-end—above the Fed’s target but below the September SEP forecast—and calls the revisions a positive inflation surprise for the Fed.

“It now stands at around 3% in July from 3.34% previously. As you said, most of the downward revision that came from, methodological changes, so the BA undertook this exercise…”—

Fed Rate Outlook — The guest expects the Fed to pause in October and deliver a final hike in December, arguing that policymakers see no urgency and want more data. She adds that the October meeting’s proximity to the midterm elections could make some policymakers hesitant to move.

“And I think in one of the clearest signals from a core FOMC members…”—

MARKETS

Sovereign Spreads — The French-German government bond spread peaked at just over 150 basis points before the OAT-Bund spread ended the day at 140 basis points. The move was attributed in part to technical factors amid difficult underlying French fundamentals. Spreads also widened in Italy, to about 120 basis points, and Spain, to more than 60, amid investor budget concerns.

“So that spread widened out significantly, peaking at just over a 150 basis points on Friday…”—

Market Turmoil And Outlook

Dominic previews the week’s focus: volatile French bond spreads, U.S. labor and inflation data, and India’s upcoming central-bank decision.

U.S. Labor And Fed Outlook

Raoul Sharma says resilient employment should keep the Fed focused on inflation, while softer revised core PCE and cautious policymakers support an October pause and a possible December hike.

French Budget And Bond Spreads

Josie Anderson describes France’s proposed deficit reduction and the political and debt-sustainability concerns driving pressure on French government bonds.

ECB Inflation And Rate Hikes

Anderson says euro-area inflation is elevated and rising core prices should prompt the ECB to hike in December and again in March, despite bond-market concerns.

RBI And India’s Rate Cycle

The Asia economist expects a measured RBI hiking cycle, with a possible 25-basis-point move as food and energy risks rise but underlying inflation remains contained.

India’s Food And Energy Risks

The speakers discuss crop and energy vulnerabilities, concluding that food inflation could weigh on consumer spending and energy costs pressure India’s fiscal and current-account balances.

Asia Inflation And Malaysia Budget

The regional outlook anticipates higher inflation in Thailand, the Philippines, and Taiwan, alongside a politically pragmatic Malaysian budget and a pause in fiscal consolidation.