Trumping Blighty
Market pricing for monetary policy experienced significant shifts over the past week in absolute and relative terms. Ahead of the US payroll data, one BoE rate cut and half an ECB one were priced out by the end of 2025. Fed pricing moved less, but disappointing payrolls trimmed that even further. Such shifts are reassuringly consistent with our global market view. Nor do payrolls threaten our relatively hawkish macroeconomic assessment. Bad weather and strikes distorted those numbers, and the unemployment rate’s stability suggests things are otherwise fine.
It was an unsurprising week elsewhere for monetary policy announcements. Colombia cut by 50bp, with three dissents for 75bp, despite concerns about rising inflationary pressures. Meanwhile, at the other end of the spectrum, the BoJ resisted hiking rates again. It maintains a bias to raise rates, albeit conditional on external developments.
The ECB received a range of hawkish data. September’s disinflationary news broadly unwound in October, with the HICP rate’s surprising rise to 2% y-o-y adding to hawkish GDP and unemployment news. Co-movement in inflation and activity surprises reinforces the hawkish signal’s strength, especially as the news was broad-based across countries and core measures. The case for a 50bp cut in December has evaporated before forming in the data. A 25bp cut remains likely before resilience urges a more gradual and limited easing cycle (see EA Reflation Squeezes Out 50bps ).
Hawkish pressure in the UK came from the new Labour government announcing a substantial increase in the size of the state, with taxes, spending, and borrowing all up and crowding out the private sector. New fiscal rules are unsurprisingly met by design. Using them to accommodate new investment plans risks creating an inefficient political slush fund. Markets tolerate Labour’s plans, but implied issuance is up by about 10% (￡142bn) over 5yrs. If the global regime changes, the UK’s raised fiscal vulnerability will matter (see UK Intensifies Tax, Spend, Borrow, Hope ).
Monetary policy should be tighter to preserve the overall policy balance after a fiscal loosening, but the UK budget impact remains a domestic story. US elections on 5 November are far more critical to global markets. In this toss-up presidential election, investors should be mindful of the path by which Donald Trump would contest a Harris victory, including how he might, this time, ultimately succeed in overturning the outcome at the end of a protracted period of market-unsettling uncertainty (see US Election: If Donald Trump Loses… ).
Trump may not be the only one to exploit a close election result. Foreign powers could also use the political void to further their geopolitical agendas. Simmering tensions could boil over in the Taiwan Strait, the Korean Peninsula, or in the Middle East through action by Israel or Iran. The volatility premium around the election may seem high relative to recently realised moves. Yet, crystalising one of these nonlinear risks could have such a massive market impact that it arguably deserves hedging despite low probabilities.
One thing that probably won’t be affected by the election outcome is monetary policy next week. We expect the Fed and BoE to cut by 25bp on 7 November, with a broad consensus now agreeing with both outcomes. Unemployment has hawkishly surprised them, suggesting policy may not be as tight as previously thought. But inflation is in the right ballpark, providing cover to keep cutting, as do the latest disappointing (distorted) payroll headlines.