IMF meetings – Dispatch from DC
Our Global Credit Team spent the past week at the Annual IMF/WB meetings in Washington DC. The global focus moved quickly from Fed cuts and the global easing to US elections, fiscal risks, and inflation re-flare. Elections are seen to highlight the lack of sustainability of the US fiscal path, and Republican policies are potentially inflationary. Post-election US trade policy is perceived as the biggest risk to both growth and inflation. The degree of investor confidence on a Republican victory has increased, so risks into elections are more balanced than a month ago. On macro, data point to a marked divergence between US and Europe. An inflation re-flare seems now the main risk in the former, while a more marked slowdown the concern in the latter. This means the Fed may cut less than priced and ECB more, with potential downside risks for EUR/USD. In China, the next month will be very important, as authorities will gauge the impact of US elections and decide whether to retaliate. In early November, we should also receive more details on the well anticipated fiscal stimulus. Concerns on geopolitics remain high but the risk of a large short-term escalation is perceived as lower. In Ukraine, there are some timid signs of more availability by both parties to come at the table for peace talks.
Middle East – Big risks postponed
During the weekend, Israel has confirmed an attack to military targets in Iran, as a response to the attacks on October 1st. The attacks avoided oil and nuclear infrastructure, thereby accommodating US demands. As such, the event could be seen as removing some short-term escalation risk. Oil and risk markets are reacting well accordingly. The scope for more escalation before US elections now seems more limited as well. As the line of direct confrontation between Israel and Iran has been crossed, though, the tension is likely to remain elevated and serve as latent market risk in the next few months.
US macro – Labor markets again
On Friday, October non-farm payrolls will bring attention back to US labor markets. The headline print is expected to come at 100k, half of September’s one and well below the 3-months average. Some one-offs should drive the slight weakness, such as Boeing strikes and hurricane-induced disruptions. Overall, the US labor market and broad macro have proven more solid than expected in the past month, but this is now well captured in rates, as the Fed terminal rate implied by markets moved higher by 50bp to 3.5%. A somewhat weak print may thus help some temporary relief in rates ahead of US elections next week.
Algebris Investments’ Global Credit Team
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