Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Stock markets around the world leaped to new highs on Thursday, propelled by optimism around the AI boom and hopes for further U.S. interest rate cuts, as investors shrugged off the U.S. government shutdown which entered its second day. 

More on that below. In my column today I look at why the U.S. government shutdown is the last thing the Federal Reserve needs right now - visibility around the labor market and inflation for data-dependent policymakers was already limited, and this just reduces it even more.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* The AI Emperor - clothes or no clothes?

OpenAI, the company behind ChatGPT, has reached a valuation of $500 billion following a recent share sale, making it the most valuable private company in the world. That's up sharply from its current valuation of $300 billion. Where next? $1 trillion? 

It's a landmark moment but raises familiar questions about whether the AI boom is a bubble. AI-related capex spending in the US is soaring but a lot is on imports, so is actually an offset to GDP growth. And the bar for future returns is high. But as long as the music is playing, investors will keep dancing. 

* What's going on with oil?

Oil prices are sliding. Fast. Brent and WTI crude futures are down nearly 10% in the last week, scraping four-month lows of $64.00 and $60.40 a barrel, respectively, as oversupply concerns grip the market.

OPEC+ countries meet this weekend and could agree to raise oil production by up to 500,000 barrels per day in November, sources tell Reuters. That would be triple the increase for October. Oil's disinflationary momentum is building.

* De-dollarization - a bit of a myth?

IMF figures this week showed that the dollar's share of global foreign exchange reserves in Q2 dipped to 56.3% - the lowest since at least the euro's launch in 1999 - from 57.7% in Q1.

But adjusted for exchange rates, the dollar's share held steady, the IMF said. According to Goldman Sachs, it actually rose for the second quarter in a row, and as capital flows expert Brad Setser notes, the official sector's nominal dollar holdings in recent years have been "basically constant". So no de-dollarization' then, at least from central banks.

After the Federal Reserve resumed its interest rate-cutting cycle last month, Chair Jerome Powell signaled that incoming U.S. economic data would play an even more critical role than usual in determining the central bank's next steps. But the government shutdown means the Fed may now be walking blind.

"We're in a meeting-by-meeting situation, and we're going to be looking at the data," Powell told reporters after the 25-basis-point cut on September 17, adding: "There are no risk-free paths now." 

Those paths have just gotten a whole lot riskier. 

The government shutdown that began on Wednesday could delay the release of a large chunk of economic data, meaning the Fed's ability to accurately assess the labor market and inflation situation – which was already limited – will now be much worse. That, in turn, could make the market rethink its own conviction about the near-term rate outlook.

Key employment and inflation data are set to be delayed, namely weekly jobless claims from the Labor Department, and all-important monthly non-farm payrolls and CPI inflation reports from the Bureau of Labor Statistics. 

The September payrolls and CPI inflation reports are due for release this Friday and October 15, respectively. They would probably be the biggest single influences in rate setters' decisions at the October 28-29 Federal Open Market Committee policy meeting.