The Weekly Look at the Global Economy and Markets

The Context The transition from September to October brought a brief respite for weary fixed-income investors – even as tech stocks pushed the NASDAQ to a new record high. That said, the structural repricing of sovereign risk began to have a greater impact on vulnerable credits, whether high-yield corporates or more rate-sensitive G7 economies such as France. Thanks for reading! Subscribe for free to receive new posts and support my work. Looking back at the past week, the defining feature of the financial landscape was the continued volatility across government bond markets. We saw sovereign yields reach multi-decade highs across a swathe of advanced economies, a bruising process that remained driven by the US. This was less an adjustment to evolving Federal Reserve expectations or fluctuations in global oil prices and growth indicators, although both elements imparted greater volatility. Rather, the market has been undergoing a long-term structural repricing in response to structurally higher demand for bond financing from governments and corporates (tech companies in particular) and a lower supply of bond financing from traditionally reliable long-term buyers. Importantly, this week provided undeniable, real-time evidence of a dynamic I have warned about: the growing spillover of interest rate risk into credit and spread risk. For weeks, many investors treated the surge in risk-free rates as an isolated phenomenon, neatly contained within the sovereign bond market. That containment strategy is now visibly under pressure, as evidenced by high-yield credit spreads last week. Even more notable is the dispersion within the Eurozone core, highlighted by the widening gap between French and German government bonds. This spread widened to about 150 basis points last week, exposing domestic vulnerabilities and reminding investors that when the protective tide of cheap global liquidity erodes, structural fiscal weaknesses are exposed and punished by markets (especially so if they come in the midst of a hotly contested election season, as is the case in France). Stock markets remained remarkably resilient throughout the week’s turbulence. Equities found comfort in the cooler-than-expected PCE inflation measure and, particularly, Friday’s softer-than-expected US jobs report, treating the cooling labor market as a Goldilocks scenario that immediately propelled the tech-heavy NASDAQ index to a new high. Jobs growth came in significantly below expectations, while earnings growth cooled somewhat. The unemployment rate rose, accompanied by a welcome jump in the labor force participation rate. The equity market reaction was closely tied to a dramatic, dovish repricing of Federal Reserve expectations. At the start of the week, the market had (too aggressively, in my opinion, as detailed in prior posts) assigned a 70% probability to another Fed rate hike in October; by Friday, that implied probability had fallen sharply to just 23%. The market-implied probability for a December hike also fell, from an almost certain 95% down to 86%. And all this as the week’s Fedspeak, while hawkish, was less hawkish than priced in the markets. This rapid recalibration of policy expectations was not solely the result of Friday’s labor data and Fed speak. It was also heavily influenced by a weaker-than-expected ISM manufacturing PMI, even though the prices paid component remained uncomfortably hot. Meanwhile, other economic data continued to show a puzzling dichotomy. The divergence between soft US survey data and hard economic data has widened further. Consumer confidence indicators are painting an increasingly concerning picture of the economic outlook, yet hard data (measuring actual output and consumption) remain solid. Elsewhere, both Europe and China recorded higher PMIs. Less comforting was the higher inflation readings in the Eurozone. Needless to say, geopolitical and related energy developments continued to influence markets. Although US-Iran discussions remained stalled, several sources reported that crude oil supplies passing through the Strait of Hormuz are now above 90% of pre-war levels. Diesel flows remained at an estimated 50%. Persistently high refined product prices, particularly for diesel, which has the most political implications, led the US government to push other G-7 economies to coordinate a massive release of inventories (up to 100 million barrels of crude oil and, far more importantly, diesel). While financial markets largely shrugged off the announcement in real time, the move has political significance. It shows how domestic political considerations and geopolitical pressure have been driving many policy decisions. In economic terms, this coordinated release is an important bet that the underlying supply outlook will improve, particularly as the Northern Hemisphere enters the high-demand winter season. The White House also secured agreement from major tech companies on a compact emphasizing self- and group policing. This came as Open AI announced a delay of its IPO to next year, while Anthropic continued to move forward with its planned offering. Other companies also announced IPO delays, waiting for rate volatility to pass. The Week Ahead Turning to the week ahead, the forward-looking focus shifts squarely to whether incoming data releases in major economies will validate the equity market’s optimism and/or alleviate the bond market’s anxiety. The economic calendar is front-loaded with the release of the US ISM Non-Manufacturing Composite index. Given the weakness already signaled by the manufacturing sector, this services data will be closely scrutinized. Should the services sector demonstrate sustained, robust resilience, the market’s aggressive pricing out of an October Fed hike may be tested even before the CPI inflation data scheduled for the following week. Midweek, the analytical spotlight returns to the Federal Reserve. On Wednesday, October 7, the FOMC will release the highly anticipated minutes from its September policy meeting. Recall that at the September meeting, the committee voted 12-0 to move forward with a 25-basis-point increase in the target range. Market participants will scrutinize the detailed minutes for clues about the internal debate behind that decision. Investors will be particularly interested in future macroeconomic developments that would prompt the committee to pause its hiking cycle, versus those that would necessitate further tightening. Globally, the upcoming week also serves as a preamble to a heavy week of meetings at the IMF/World Bank Annual Meetings in Thailand. Look for the International Monetary Fund’s analytical chapters of its October 2026 World Economic Outlook, with the release scheduled for October 5 and 6. Other interesting data releases include US trade data, New York Fed inflation expectations, jobless claims, UMich sentiment, and consumer credit Eurozone: Retail sales, PPI inflation, and PMIs Japan: Consumer confidence, trade, leading indicators and PMIs UK: PMIs In emerging economies, look in particular for the results of the very tight first-round election for president in Brazil. Publications this week: On the two secular forces shaping finance – https://www.project-syndicate.org/commentary/financial-industry-must-adapt-to-world-of-ai-digitalization-government-interventions-by-mohamed-a-el-erian-2026-09 Image generated by Google’s Gemini A I Thanks for reading! 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