Take Five: Shaky September – Reuters Analysis

U.S. employment statistics are set to take center stage as markets prepare for a potentially volatile September. Meanwhile, France is grappling with political turmoil, Germany is gearing up for regional elections, and leaders from Africa are en route to Beijing for a significant forum.

Here’s a comprehensive overview of what to expect in the financial markets this week, brought to you by a team of reporters from various global cities.

1. U.S. Employment Data

With the Federal Reserve on the verge of implementing its first monetary policy easing in years, all eyes will be on the U.S. employment figures due on September 6. These numbers are crucial in assessing how aggressively the Fed might proceed with rate cuts in the coming months. Fed Chair Jerome Powell has indicated it may be time to lower interest rates, with many market participants anticipating a 25 basis point cut at the upcoming meeting on September 17-18.

Continued signs of labor market weakness, which previously unsettled markets during late July and early August, could reignite recession fears and push investors to divest from riskier assets. Expectations of significant rate cuts have also contributed to the dollar’s decline, pushing it to one-year lows as the anticipated easing narrows the yield differential between the U.S. and other developed nations.

2. Market Volatility

Global stock markets have rebounded to near record highs following a sharp decline in early August that was triggered by an interest rate hike from the Bank of Japan, leading to a series of sell-offs. However, analysts at Bank of America warn that September and October typically see increased volatility in the stock market, and expectations for future swings may be underestimated by some strategists.

August’s sell-off was exacerbated by collapsing carry trades that had bet on U.S. interest rates remaining significantly higher than Japan’s. This triggered widespread liquidation of other assets, resulting in approximately $1 trillion lost in U.S. tech stocks. While markets are currently optimistic that Fed rate cuts will bolster stocks and bonds, unexpected data releases could disrupt currency markets and lead to further shocks across asset classes.

3. Political Climate in France and Germany

France has abruptly shifted from a summer of celebration after hosting the Olympics to a pressing need for a stable government, reigniting focus on President Emmanuel Macron’s political challenges. The socialist and green parties have declined further negotiations with Macron, who has dismissed prospects for a leftist coalition.

Amidst this uncertainty, investors are turning away from French stocks, with the index standing 5% below its June levels — before Macron’s announcement of a snap election — and showing minimal gains this year compared to a 12% rally in German shares.

German politics, too, faces challenges with elections scheduled in two eastern states on September 1, which could influence the broader political landscape ahead of the federal election in 2025. Populist parties are expected to perform well in the context of a struggling economy, which contracted by 0.1% in Q2. The Ifo Institute president notes that the economy is steadily slipping into crisis.

4. Bank of Japan’s Stance

Despite recent market turbulence, Bank of Japan officials remain committed to their path of monetary tightening. Governor Kazuo Ueda’s hawkish stance has clashed with concerns about a recession in the U.S. and a sell-off in global stocks. Deputy Governor Ryozo Himino affirmed that if inflation progresses as expected, the BOJ will continue its tightening measures.

However, the outlook for consumer inflation is mixed. Tokyo’s consumer price index rose to 2.4% in August, surpassing the BOJ’s target, although the core-core measure, which excludes fresh food and energy, stood at only 1.3%. August retail sales figures did not meet expectations, and household spending has declined consistently since February of the previous year, with a further update expected on September 6.

5. African Leaders in China

Leaders from various African nations, including Kenya, Senegal, and South Africa, are traveling to Beijing for the ninth edition of the Forum on China-Africa Cooperation. This triennial meeting signifies the primary summit for engagement between China and Africa, occurring against the backdrop of rising Chinese lending to the continent, which hit $4.6 billion last year — the first increase since 2016.

However, this amount is significantly lower than the peak levels experienced between 2012 and 2018, during which lending exceeded $10 billion, largely driven by the Belt and Road Initiative. African officials are eager to secure commitments from China for increased financing and investment, while certain nations, such as Ethiopia, will prioritize discussions on debt restructuring.

This week promises significant developments across various global markets, influenced by labor data, political dynamics, and international cooperation.