You don't mess with the Zohran!

A “mandate for change”

AI euphoria gave way to concerns relating to bubble valuations during the past week, with this weighing on stock prices. However, strong momentum in tech earnings is likely to be sustained in the short term and it still appears that the pace of investment spending is in the process of continuing to accelerate, rather than slowing down.

In this regard, it has also been interesting to witness new jumbo corporate bond issues from Google and Meta in the past week. These companies, which used to operate as huge generators of cash, are now in the vanguard of those putting funds to work. Consequently, there is a growing sense that heavy corporate bond supply could be a factor that limits the ability of spreads to rally further, even if other risk assets continue to perform well.

Spending on AI in the US is projected to accelerate from around USD75 billion in 2025 towards USD300 billion in 2026. With this scale of investment, it seems likely that GDP estimates for the coming year can witness further upward revisions.

We are also mindful that power demand can outstrip the growth in supply, as data centres come online. With companies prepared to pay up in order to secure capacity, this could also represent a possible upside risk to price pressures in the course of the coming year.

Prospects for robust growth and higher inflation mean that we can’t see the case for many Fed cuts into 2026, even if the labour market remains soft. As a result, we might infer that 10-year Treasury yields in a range between 4-4.25% may sit around a longer-term equilibrium level.

Elsewhere, the US government shutdown continues to linger, in the absence of any compromise between the parties in Washington DC. This week, Trump has been unable to persuade GoP Senators to ditch the filibuster, which would allow the party to push through a bill to fund the government, based on a simple majority. Meanwhile, air travel delays and cancellations continue to worsen, and thoughts are now turning towards the peak travel period over the upcoming Thanksgiving holidays.

Now in a second month, another consequence of the shutdown is that a number of economic indicators won’t ever be released, as data collection has been suspended over this period. From that perspective, if there is not a resolution soon, the Fed won’t be able to assess a November payrolls report at the time of the December FOMC meeting, rendering economists and policymakers temporarily blind (or at least partially sighted).

That said, most data releases that have been available over this period have all tended to be relatively robust, including this week’s ADP employment report and ISM services survey, though an increase in Challenger job cuts painted a more sombre picture.

The US Supreme Court has also been a focus of attention over the past week, with the justices raising material concerns with respect to Trump’s imposition of tariffs under the International Emergency Economic Powers Act (IEEPA).

A final ruling from SCOTUS may not be reached until the end of this year, but betting markets are now pricing a 75% probability that this will go against the US President, rendering these tariffs void. In this case, we fully expect the administration to enact a blanket sectoral approach to imposing tariffs, such that the revenue being collected can be preserved.

We also think it is unlikely that companies will be able to mount a successful challenge in order to secure any compensation or repayment of tariffs already paid. However, the average effective tariff rate is nonetheless likely to decline by a couple of percentage points in this scenario. This could be a factor which weighs on longer-dated yields, if this leads to an upward reappraisal of deficit projections, and this has been a factor in helping the US yield curve to steepen somewhat over the course of the past week.

Newsflow in Europe has remained relatively muted over the week. Short-dated yields in the Eurozone have been largely anchored by an ECB that seems to be firmly on hold. Appetite for longer-dated securities continues to be overshadowed by prospective changes in the balance between supply and demand.

Heavy government bond issuance across the region into the coming year is occurring at a time when Dutch pension funds, who have been one of the largest sources of long-dated bond demand, are likely to be absent from the market following regulatory changes that took effect last month.

French Budget proposals could also discourage demand for life insurance products from wealthy citizens, which could, in turn, put a dent in the buyer base of OATs. More broadly speaking, our own sense is that there is structurally less demand for duration on a global basis, with investors in fixed income nowadays more focussed on securing attractive yields by adding carry in areas like credit. Consequently, we think that term premia can stay elevated, such that investors are incentivised and tempted to extend duration risk.

In the UK, Rachel Reeves made a pre-Budget address in Downing Street in the past week, seemingly laying out her case for forthcoming substantial tax increases. There may be a growing sense that Reeves has decided that her only option is to trash the economy further, in the hope that this brings inflation and borrowing costs down.

In this case, she might hope that she will be around to have the chance to claim that economic pain has been worthwhile, if it means lower mortgage rates and lower government borrowing costs as a result. In this regard, the Bank of England maintained interest rates at 4% this week, though a 5-4 split vote helps support the notion that a cut is likely at the next meeting in December.

From a political perspective, we are some way from the next General Election in 2029. Therefore, it may be expedient to endure more economic pain in the short term, in the hope that things turn for the better before UK voters get a chance to return to the polls.

Yet, there remains the risk that if Labour thinks that tax cuts alone can fix the UK fiscal problems when the national tax burden is already at very high levels, then this could yet end in failure. Ultimately, the government will also need to demonstrate that it can control welfare spending or else run the risk of lurching back into concerns relating to debt sustainability.

A modest flight towards quality saw the yen firmer over the past week, as carry trades were taken off for the time being. However, this may prove a temporary reprieve for the Japanese currency and selling pressure could re-emerge if investors start selling the yen once more to fund their favoured long positions.

With the threat from intervention seemingly low this side of Y160 versus the dollar, there will need to be more of a sense that the BoJ has a free hand to hike rates in December (or January at the latest), in order for the Japanese currency to attract more support. If the BoJ does not move in January, this may infer that no rate hike is likely until the new fiscal year and consequently interest rates may be stuck at 0.5% until next May, even with inflation remaining at 3%, where it has been on average for more than three years now.

The Japanese economy continues to experience moderate economic growth, even as the working population declines. Meanwhile, we have noted labour unions already calling for 6% pay hikes to be embedded in the Shunto wage round next March.

From this standpoint, Japanese macroeconomic policy does not appear appropriate, and it will be important that newly-elected Prime Minister Takaichi does not make policy errors that make things worse, not better. We remain cautious on overall JGB duration, though continue to highlight what we regard as a mispricing in the superlong sector, given an imbalance between supply and demand, which the MoF needs to act upon to address.

Elsewhere in FX, the dollar has also continued to edge stronger, as investors who have been short continue to re-assess the prospects for stronger US economic growth. The pound has been an underperformer, and we are tempted to think that the UK government would be very happy to see sterling weaker to mitigate against the pain of its tax plans.

The Canadian dollar has also traded softer, as hopes for progress on tariffs and trade with the US have cooled. Precious metals have also seen declines in prices, as speculative enthusiasm appears to be on the wane. This has also been a feature in digital assets, with Bitcoin now 20% below its highs and back towards where it was trading at the start of 2025.

Looking ahead

The absence of US economic data or central bank activity could make for a quiet week on the surface of things, but in the past few weeks, we have witnessed how there can be plenty of other catalysts that are market moving.

Returning to US politics, another focus in the past week has been on the mayoral race in New York, where 34-year-old Zohran Mamdani was elected with over 50% of the vote. As a socialist Democrat, Mamdani is something of a polarising figure on a national level, with Trump eager to goad and mock the ‘liddle communist’, as he has referred to him.

However, what this election has shown Democrats more broadly is if they can find popular (and youthful) candidates, this may represent a way back in the midterm elections to be held this time next year.

As for whether the path forward for the Dems is to head in a more progressive, socialist direction, echoing the mantra of Mamdani and others like Bernie Sanders before him, is more questionable. There is a sense in which rage towards Trump is a polarising force. But US political battles have tended to be won in the centre and Zohran would do well to remember this. If he does, then he may have a long political career ahead of him….

^{* The information contained in this material is correct as of the publishing date of this article and is subject to change frequently.}