The Two Weeks That Will Be (5th October 2025)
1. Japan
Barring an unlikely outbreak of consensus building between all of Japan’s opposition parties to unite against an alternative candidate, the new leader of the LDP, Sanae Takaichi, will become Japan’s first female Prime Minister in a parliamentary vote (probably on Wednesday 15th October). Her unexpected victory was driven by her strong showing with party members in the first round of voting – pushing her rivals to choose her in the second round, albeit by a slim margin:
There’s nothing like losing your majority in both houses of parliament to concentrate MP’s minds on appealing to voters. But with more parties gaining meaningful representation in Japan than ever, Takaichi’s particular brand of robust conservatism faces just as difficult an electoral challenge as that which faced her more beige predecessor, the trainspotter and miniature model aficionado, Ishiba.
Takaichi benefited from former PM Taro Aso swinging his group in behind her, for which he is expected to be rewarded with a senior role. Both Aso and Takaichi were close to former PM Shinzo Abe, with Aso instrumental in delivering Abe’s agenda as his long-serving Finance Minister. Takaichi also has a soft spot for the Three Arrows of Abenomics, a fact unlikely to be lost on President Trump, who is now squeezing in a visit to Japan at the end of October during his trip to Asia. Trump’s love for Abe re-emerged after the failed assassination attempt on the former last summer, with the (unfortunately departed) latter enshrined in memes as the saviour of The Donald.
After visiting Japan, Trump is moving on to South Korea for the Asia-Pacific Economic Cooperation Summit, where he is expected to hold a meeting with President Xi Jinping. The LDP evidently considered a former TV show host with a penchant for heavy metal music and motorbikes who once interned with a US congresswoman would be best placed to handle the US President at this crucial moment.
2. The bond markets
Away from foreign policy, markets expect Takaichi to deliver a kind of reheated Abenomics, anticipating she will make good on her reflationary promises. Upon becoming leader she declared “Japan may no longer be in deflation. But its economy is still at a critical phase. We can’t leave cost-push inflation unattended. It’s too early to be complacent [on a return to deflation]… What would be best would be to achieve demand-driven inflation, where wages would rise and drive up demand, which in turn causes moderate price rises that boost corporate profits”. She concluded that she will look into whether the government should revise a joint statement it made with the BOJ in 2013, as they ‘must move in lockstep and cooperate with each other in guiding economic policy’. Although she refrained from overt criticism of the BOJ this time round, she did say a year ago that “it would be stupid to raise interest rates now”. Trump will no doubt love such plain speaking.
The bond markets will be less receptive. They are already wobbly as we enter the final quarter of the year. In the last two weeks there have been two poor Japanese government bond auctions with the longest tails in six months, a technically uncovered 10y German government bond auction and a relatively soft UK 10y Gilt auction.
The Bank of Japan announced that it will reduce its bond purchases this quarter, and by more in the 10y to 25y sector:
BOJ Governor Ueda had been trying to return interest rates to where they were more than twenty years ago. It will be a tougher plough to furrow if Takaichi wants him to be her Kuroda. (Tricky central bank governors being something else for Donald and Sanae to chat about). Ueda speaks on Wednesday.
3. The UK
A steeper Japanese yield curve would be an unwelcome canary in the coalmine for UK Chancellor Reeves. There are two Gilt auctions coming up in the next two weeks (on each Wednesday) and we are entering the period during which the OBR is taking a snapshot of market parameters ahead of the second round of its forecast which will be handed to the Treasury on Monday 20 October (assuming their snapshot occurs in line with the timetable followed in the run up to the Spring Statement).
The IMF Annual Meetings start on Monday 13 October and Reeves will be hoping not to face a re-run of Kwasi Kwarteng being greeted by tweets of his upcoming P45 upon landing from Washington three years ago. Unfortunately it is PTSD over this whole episode that led Reeves to deify the OBR. Markets really shouldn’t need any OBR model to know that tax rises are coming, shredding the government’s last vestiges of credibility and weighing on UK growth for some time to come. The latest GDP numbers will be released on Thursday 16th October.
4. France
A similar episode of political theatre is playing out in France. Reeves can’t please both her party and the markets; Emmanuel Macron cannot please anyone. His latest choice for Prime Minister, Sebastien Lecornu, is only just getting round to putting his cabinet together, and it contains few fresh faces. Despite retaining the leader of Les Républicains, Bruno Retailleau, he was met with a tweet from the latter complaining that the cabinet choices did not reflect the break with the past that was promised, and that he would be convening a meeting with his party to respond. Meanwhile to the left of Lecornu, the Socialists are fomenting that he hasn’t gone far enough in their demands for a wealth tax.
A draft of the Budget is supposed to be presented to the national assembly by mid October in order for it to be passed before the end of the year. Lecornu appears to have made a concession by announcing that he would not use Article 49.3 of the Constitution to ram through the Budget. All of the budgets since Macron’s re-election have had to use this mechanism, where the government can force it through but potentially face a no confidence vote for doing so. By backing down on this, Lecornu is avoiding the showdown that removed Barnier.
But it does not solve the conundrum: there is no majority in parliament for a budget to be passed. Therefore it is less of a concession and more of a trap. When the budget inevitably fails to be agreed, both left and right will argue it was because they didn’t get what they wanted, and the government will fall, with all sides hoping to have reinvigorated their voter base ahead of fresh elections. Macron and Lecornu will hope that by renouncing 49.3, the public put the blame on everyone else for the chaos that will ensue.
5. The US
Whilst governments in Japan, France, Germany and the UK desperately attempt to grope for a mandate and a majority, President Trump just managed to dispense with one of the main impediments to his mandate. The government shutdown is going to make the perfect argument to his voters that less government is better than more. He even has a man in charge of the Office of Management and Budget who ran a #MAGA think tank. The longer it goes on, the stronger Trump will feel his argument has become.
And so we shouldn’t expect a speedy resolution, unless the Democrats swerve out of the game of political chicken first. The 2018 shutdown lasted 35 days. This means that there will be a paucity of US data for some time (Our summary table has italicised the US data that is unlikely to be released). Into the gap, more focus will fall onto private survey data, such as the Michigan Consumer Sentiment survey on Friday.
This also benefits Trump. He, and his acolytes on the FOMC, will argue that the central bank shouldn’t need a couple of data points to realise the economy is in dire need of rate cuts. They’re already, as he might say, “too late”. In any case, the data itself has become unreliable. Forcing the central bank to make decisions without it will only strengthen Trump’s argument that the data is no longer fit for purpose. Stephen Miran speaks into the data void twice on Monday.
6. Earnings
With little US data, China on Golden Week holidays, France and Japan scrambling to assemble governments and the UK Prime Minister trying to avoid the spotlight for his malfunctioning government, the main new information will come with the return of earnings season. It kicks off with JP Morgan, Citi and BlackRock on Tuesday 14th October.
The VIX remains remarkably becalmed but implied volatility on the S&P500 is still higher than realised volatility. Goldman Sachs said the “divergence… is at one of the most pronounced differences we’ve seen on record”.
Either markets are about to come in for a shock, as they so often do in October, or we are due an astonishingly quiet couple of weeks. The macroeconomic and political fundamentals would suggest we are far more likely to see a shock.
