USD

This week’s meeting of the Federal Reserve is shaping up to be a crucial one, and not just from the point of view of routine monetary policy. It is not clear whether Governor Cook will be able to participate,as she battles Trump in court over his attempted firing. But the spotlight will be over which aspect of stagflation Chair POwell chooses to focus on: the slowing labor market, a more urgent problem after the BLS revealed that it had massively overstated job gains, or an inflation rate that is still clearly above target, has been for five years, and is now if anything trending higher – even before any meaningful upward pressure from the tariffs shows up in the data. We do not envy the Fed’s position here.

GBP

This week’s data deluge will go a long way towards clarifying the state of the UK economy. We expect that the labor data (Tuesday) and inflation report (Wednesday) will confirm that the UK is in the middle of a stagflationary process, with inflation remaining far above Bank of England targets while the labor market continues to slow down, much as in the US. ON the positive side, the sell off in the Gilt market seems to have abated for now and yields have stabilized, though sentiment remains fragile and another Labor fiasco along the lines of its recent failure to carry through modest spending cuts would probably cause the uptrend in yields to resume.

EUR

The September meeting of the ECB was the nonevent most were expecting, and no more cuts are expected by the market. Nevertheless, the closing of the interest rate gap with the US (a positive for the common currency) is for now counterbalanced by worries about the French fiscal picture. As in the UK, even modest cuts seem to be politically impossible and the French deficit is the worst in the eurozone. Already sky high taxation levels make it difficult to close the gap through the usual expedient of tax increases. Fitch’s downgrade of France’s sovereign rating over the weekend underscores the problem. This week is a quiet one for the EUrozone so the euro will trade off events elsewhere.