6 Oct 2025
Global markets are currently navigating significant political and economic developments, including a recent prime ministerial resignation in France and a surprising new leadership appointment in Japan. Concurrently, the ongoing US government shutdown is hindering the release of crucial economic data, presenting a challenge for the Federal Reserve's data-dependent policy decisions.
The French Prime Minister resigned just one day after President Macron announced his new cabinet, stating that the proposed cabinet showed no significant change from the previous government and could trigger a political crisis without further modifications. This political instability led to a decrease in France's 10-year bond yields to 3.6% and a significant widening of the yield spread between French and German bonds, reaching its highest level since late last year. This widening spread is a crucial metric for assessing France's financial risk, highlighting the escalating political tensions and the necessity for difficult fiscal decisions to address the country's debt and budget deficit.
Japan's Liberal Democratic Party (LDP) has elected Ms. Takaichi as the new Prime Minister, an unexpected choice. While she enjoys popular support, her proposed policies are distinct and, in some aspects, aggressive. She explicitly opposes interest rate hikes, describing any such move by the Bank of Japan (BoJ) as 'foolish,' which has dramatically reduced the market's expectation for a BoJ rate increase. Her anticipated policies are expansionary, likely including reforms to state-owned enterprises, which could incur substantial costs for Japan, a developed nation already holding the highest level of national debt.
The Japanese Yen continues its weakening trend, a reaction further intensified by the news of the new Prime Minister. Traders responded by selling Yen and shifting investments towards the Japanese stock market. This excessive weakening of the Yen, however, exerts significant upward pressure on the prices of imported goods, which is undesirable for a population already contending with inflation and a strong preference for foreign products.
Recent retail sales data released from the Eurozone demonstrated no significant changes or substantial market impact upon its publication.
The US government remains in a state of shutdown, severely impacting the availability of critical economic data. Key reports, such as the Non-Farm Payrolls last week and other specific data this week, have not been released. This absence of data significantly constrains the Federal Reserve's ability to make informed policy decisions, given its strong reliance on economic indicators.
Federal Reserve members are scheduled to deliver numerous speeches and talks this week, where they are expected to discuss their approach to policy-making in the absence of complete economic data. Their remarks will likely cover their outlook on the labor market, inflation, and the broader implications of the ongoing government shutdown on the economy.
The US stock market performed better than historical expectations in September, avoiding the significant decline often seen during this month. For the third quarter, only basic consumer goods recorded a negative performance, declining by 3.5%, while all other sectors showed either positive or modest growth between zero and one percent. The outlook for October is generally positive, with historical trends indicating favorable market performance, increased volatility, and a higher number of trading days (23 compared to the usual 21).
The US stock market is currently exhibiting good performance, as investors are not anticipating a prolonged government shutdown. However, any development suggesting an extended shutdown or difficulties in negotiations between Democrats and Republicans could negatively impact market sentiment. It is noteworthy that October 13th is a day when the stock market will be open, but the bond market will be closed, likely due to bank holidays. The historical precedent of a shutdown lasting over a month under the Trump administration raises uncertainty regarding the ultimate duration of the current government closure.
The substantial widening of the spread between French and German 10-year bond yields, now at its highest since late last year, serves as a critical indicator for assessing France's financial risk amidst increasing political tensions and the imperative for difficult fiscal reforms.
| Event | Details | Market Impact | Implication |
|---|---|---|---|
| French PM Resignation | PM resigned after Macron's cabinet announcement, citing lack of change and potential for political crisis. | French 10Y bond yields decreased to 3.6%; France-Germany yield spread widened significantly to year-end high. | Increased financial risk for France; necessitates difficult fiscal decisions on debt and budget. |
| Japan's New PM (Ms. Takaichi) Elected | Surprising election; popular but aggressive/unique policies, strong opposition to BoJ rate hikes. | Probability of BoJ rate hike significantly reduced. Yen weakened further; traders favored Japanese stocks. | Expectation of costly expansionary policies (for high-debt Japan); weak Yen causes imported inflation concerns. |
| US Government Shutdown | Ongoing shutdown, leading to non-release of crucial economic data (e.g., NFP last week). | Ties the Federal Reserve's hands due to its data-dependent policy framework, creating uncertainty. | Fed members' speeches this week will offer critical insights into policy without full data. |
| US Stock Market Performance & Outlook | September performed better than historical average; Q3 mostly positive (except basic consumer goods). October historically positive with increased trading days. | Current good performance, market not pricing in a long shutdown. | October outlook positive, but prolonged shutdown duration remains a key risk factor for market sentiment. |
