US – Green light for easing
Last week, CPI surprised to the upside. Core CPI was broadly in line with expectations, but weaker passthrough to core PCE combined with higher initial jobless claims sparked a short rally in rates. Markets are now discounting three cuts by year-end, with September leaning toward 25 basis points but a 50 basis points reduction not fully excluded. The Fed is likely to maintain flexibility, weighing softening labour conditions against persistent services inflation. Easing cycle is ready to start.
Japan – Political transition raises fiscal risks
Prime Minister Ishiba’s resignation from LDP leadership adds further political uncertainty just as the BoJ faces a difficult tightening path. Leadership elections with multiple candidates may dampen sentiment and delay policy clarity. While normalisation remains the medium-term objective, near-term progress will likely be uneven, keeping JGB markets vulnerable to shifts in risk appetite.
France – New Prime Minister, same challenges
As anticipated, Bayrou failed his confidence vote and President Macron quickly appointed Lecornu as Prime Minister. The new government will need left-wing support to pass a credible budget, implying that fiscal consolidation will fall short of prior ambitions. Core structural issues remain unresolved, and with OAT-Bund spreads having recently tightened, we see scope for renewed widening as political uncertainty resurfaces during budget negotiations.
ECB – Holds steady, December in focus
Last Thursday, the ECB left policy unchanged, as expected, combining hawkish tone with dovish projections. President Lagarde kept December open for potential easing, now priced at 15%. To justify a cut, inflation would need to undershoot meaningfully in the coming months. We think that a sharp appreciation in the euro could provide an additional catalyst, particularly if it feeds into the inflation outlook.
Algebris Investments’ Global Credit Team
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