ASIA STOCKS: Japan Stocks To Fresh Record High On Takaichi Victory
Japan stocks have surged in the aftermath of Takaichi winning the LDP leadership battle. The combination of Takaichi's pro growth/dovish BoJ backdrop has seen local bourses post sharp gains. The NKY 225 is up 4.5%, while the Topix has gained nearly 2.9%. Elsewhere US equity futures have ticked higher but remain just short of recent highs. The US government shutdown drags on, while Monday focus may rest with the Trump administrations government job cut announcements (reportedly expected to be in the thousands). China and South Korean markets remain closed. Much of Australia is also out, although the ASX200 is still trading (down modestly).
- Japan indices, now at fresh record highs, have been aided by the weaker yen trend (we are approaching the 150.00 level), with the Topix transport gaining 2.8%. The bank sub index has lagged though, as BoJ hiking expectations have been pared, this sub index down 2.5%. Fiscal concerns under the new Takaichi regime are yet to impact broader sentiment (although the potential for pro growth from higher government borrowing/spending is a market positive). Also note offshore investors have mostly been net sellers in recent week of local stocks, so they may be coming back into the market as we break higher.
- Elsewhere Hong Long markets are weaker, but this follows a strong run higher recently. The HSI off around 0.75%.
- In South East Asia, Philippines losses have been evident. The PCOMP down a further 0.80% at the time of writing. We are still above recent lows (sub 6000), but earlier headlines from the Stock Exchange CEO noted the challenges facing the market amid near term political instability/corruption probes. (via BBG). Offshore investors have been net sellers of local stocks so far in Oct.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
