Markets
“We’re not in that business anymore.” Fed Warsh in his fireside chat with IMF’s Georgieva during Asian dealings steered clear from any guidance on the October 28 policy meeting. The objective, he said, is to get policy right. He mostly talked about AI and its consequences otherwise. There will be some for Fed policy, as the central bank plans to adopt AI amongst others to obtain more timely (real-time) data as well as help in the analysis of it. Warsh holds an optimistic view in terms of the economic impact. He expects more productive economies, not least the US. Such a positive supply shock, however, is one for the long-term. AI would have a short-term impact through the demand-side first, Warsh said, adding that the US is experiencing a “massive investment surge”.
Warsh prefers to keep his cards close to his chest because he wants the data to speak for themselves. Yesterday’s batch showed intensifying upstream price pressures with September PPIs coming in hot and quicker-than expected. US retail sales were solid last month, especially considering they come after a very strong August. A sharp rebound in the NY Manufacturing Index and jobless claims holding near a low 200k top off the series. US Treasuries shrugged it off with yields tumbling between 6 and 13 bps in bull flattening. Haven flows (Wall Street gapped lower in the open before eventually closing unchanged to higher) and ongoing short-covering drove the move. US money markets attached a 75% probability for a Fed rates status quo later this month. Warsh’s appearance has lifted that to 85% this morning. Bunds strengthened too but underperformed vs. Treasuries. German rates fell 1.7-5.3 bps. The 10-yr tenor fell through the 3.4% neckline of a (yield) bearish head-and-shoulders pattern before rebounding again into the close. The jury’s out whether it’s a first sign of bottoming. We expect overall equity/AI sentiment will have the final word, at least from a daily perspective.
The sharper US yield drop weighed on the dollar. EUR/USD recovered to north of 1.12 with minor follow-up gains this morning. We see little further upside potential for the common currency with the French theme slumbering in the background. Sterling keeps the other hands against the euro. EUR/GBP swapped gains for losses yesterday. The pair grinds further lower this morning. Closing below 0.8455 on a weekly basis would be an important technical signal. Bailey in Bangkok this morning said there are signs of an increase in the neutral rate. That would mean policy is currently less restrictive than previously thought. The BoE governor said the UK economy is more resilient than expected but signs of second-round-effects coming from the energy price shock remain subdued as of yet. UK money markets widely foresee a November hike (91%).
News & Views
MSCI announced the launch of a consultation on a proposal to reclassify the MSCI Indonesia indexes from Emerging Market to Standalone Market status. A final decision is due by June 2027. From a downgrade perspective, “standalone market” is a bigger setback than the January 2026 warning to move from EM to “Frontier Market” if concerns about shareholders transparency and coordinated trading aren’t fundamentally being addressed. Today’s statement highlights that despite announced reforms, significant concerns remain around market dysfunction, including continued suspected coordinated trading behavior and lack of evidence of meaningful enforcement. Feedback from market participants suggests that a reclassification to Frontier Markets would not properly recognize the depth of the market problems. MSCI will continue applying the existing freeze on certain index related changes for Indonesian securities resulting from Index Reviews or corporate events until further notice. The Jakarta Composite index dropped 11% today to its lowest level since November 2020. Reclassification to Standalone Market would, amongst others, see removal from EM benchmark indices and a lot of forced selling by EM funds and ETF’s.
The Turkish equity market today received a warning similar to the January from MSCI to Indonesia. MSCI will apply an interim freeze on certain index related changes for Turkish equity securities, effective immediately and until further notice. At the core of the issue are serious concerns about possible coordinated trading through fund holdings closely affiliated with certain smaller listed companies which undermines the reliability of free float estimates and market integrity. Should sufficient regulatory progress not be evident by June 2027, MSCI will consider additional measures, including a consultation on a potential reclassification of the MSCI Turkey Indexes from Emerging Market to Frontier or Standalone Market status.
