US inflation came in parallel to expectations, confirming that headline inflation in the US stagnated near 0.3% level for a third month, the yearly figure rebounded from 2.4% to 2.6% as expected, while core inflation remained stuck at 3.3%. The difference between the headline and core inflation comes from weak oil prices, which help tame the index that includes the volatile food and energy prices, but housing, used cars, airfares and medical care continued to push the core figure higher. And the core CPI hasn’t eased since July, averaging near 3.5% this year, according to Bloomberg. In summary, the data looked good, but could’ve been better.

The market reaction to the data was mixed. The US 2-year yield eased after hitting a fresh high since summer, the probability of a 25bp cut in December jumped back to 80% from around 60% before the CPI data, and Minneapolis Federal Reserve (Fed) Neel Kashkari hinted that he liked yesterday’s inflation data. On the long end of the curve, however, the US 10-year continued to push higher and is preparing to reach the 4.50% level as next stop amid the rising bets that the yield deserves to hit the 5% mark on prospects of higher inflation under Trump’s pro-growth policies, upcoming tariffs and the Fed’s potential ignorance of the upcoming inflationary pressures. The US 30-year yield is now at 4.65%.

As such, the US dollar – that looked slightly soft after the CPI data –rebounded to extend its rally to fresh highs. The US dollar index has now hit the highest levels in a year, it’s clearly in the overbought market territory, with the RSI index screaming that the dollar has been probably bought too fast and in a too short period of time and a minor correction could be healthy at the current levels. Yet, the picture is clear, the US dollar outlook is comfortably positive and the bulls are tempted to buy on rising suspicion regarding the Fed’s ability to keep cutting the interest rates. Note that the bets for next year cuts have halved since last month.

As such, the EUR/USD tanked to 1.0534 level this morning with the bears eyeing the 1.05 mark. The RSI indicator – that’s warning of oversold conditions in parallel to the overbought conditions of the dollar index – seems to be the only challenge for the euro bears right now. Across the channel, Cable eased to 1.2673, the pair is also very close to oversold conditions. The AUDUSD pulled out the 65 cents support and is weakening below this level, supported by the data that showed that inflation in Australia fell to a 3-year low. And the USDJPY spiked past the 156 level this morning, near overbought as well, but with some additional margin left before the Japanese authorities intervene directly to ease the selling pressure near the 160s level. The USDCHF rallied past the 200-DMA and the USD/CAD has pulled out the 1.40 target and is consolidating gains above this psychological mark. I believe that the temptation to long the US dollar at the current overbought levels should start fading in the short-run and bring in some tactical shorts to ride on a minor correction. But the medium-term outlook looks bullish for the US dollar. Price pullbacks could be interesting opportunities to strengthen the bullish US dollar positions.

Data watch

The US will reveal its latest PPI update today, and the figures are expected to point at an uptick in factory-gate prices in October. The headline PPI is seen rebounding from 1.8% to 2.3% in October, and core PPI from 2.8% to 3%. And don’t forget that there are components in these figures that feed into the Fed’s PCE index. Therefore, even if these numbers are in line with expectations, they should be warning that a 25bp cut from the Fed is probably not the right thing to do. I am not saying that the Fed won’t do it. I am just saying that it’s probably not the right thing to do.

Fed Chair Powel will speak today. I am curious to hear what he say to say, if he says anything at all in the face of the US politics that are turning into a massive TV reality show.

Elsewhere, the S&P500 consolidated near ATH levels, Nasdaq 100 was slightly down, while the Dow Jones was slightly up. The Russell 2000 stocks didn’t like the upside pressure in yields probably, because the index fell nearly 1%. European stocks failed to cheer the weaker euro, as Trump is much less supportive of the valuations on this side of the Atlantic Ocean than he is at home. The only positive in Trump’s threats is its potential to push the European Central Bank (ECB) to cut rates thoroughly to give support to the already-weakened European economies. But alas, to do be able to cut the rates, the ECB needs to make sure that inflation has stabilized. Yet, the rapid depreciation of the euro puts that objective in jeopardy.

In energy, oil made a short attempt to the upside yesterday on a surprise decline in US oil inventories last week, but gains remained limited. The barrel of US crude is seeing a strong resistance this morning near the $68pb level. Numerous failures to clear the $72.85pb Fibonacci resistance keeps the market in the hands of the bears, with the ambition to pish the price of a barrel to $65pb target.

Source: Reuters

In focus today

From the US, October PPI is due for release today. Yesterday’s CPI print was largely in line with expectations (see more in section below) hence it will be interesting to see if October PPI data mirrors this. In the evening, the Fed chair Powell will be on the wires.

In the euro area, we will receive the second estimate of Q3 GDP. Focus will be on employment developments in Q3, since a continued strong labour market is important for the growth outlook in 2025. We will also receive industrial production data for September, which will show how actual production fared. The data is interesting as hard data has been better compared to PMIs in the manufacturing sector. We also get the ECB minutes from the October meeting.

In Sweden, the final inflation data for October is released at 8.00 CET. The reading will provide insights into last week’s flash estimate, which was a bit higher than expected, and deviated 0.3-0.4 pp. from the Riksbank’s September forecasts. We suspect the deviation could be due to higher food prices, as was largely the case in September.

Overnight, we get the monthly batch of data in China for retail sales, home sales, home prices, industrial production and investments. Focus will be on the housing data as a recovery here holds the key to unleashing private consumption as well. Some early data has suggested home sales rebounded in October following the recent stimulus measures.

Similarly, we also receive Japanese Q3 national accounts including GDP growth overnight. Both the Tankan and PMI surveys suggest the recovery has remained on track. Demand also looks quite solid, particularly exports. Consensus sees modest 0.2% GDP growth following the 0.7% Q2 rebound.

Economic and market news

What happened yesterday

In the US, October CPI was largely in line with expectations at 0.2% m/m SA (cons: 0.2%, prior: 0.2%). While the annual figure jumped to 2.6% y/y from 2.4%, the uptick was almost purely related to a weaker print a year ago. The core measure also came in as expected at 0.28% m/m SA (cons: 0.3%, prior: 0.31%). Around 60% of the increase in core prices attributed to the shelter component, which ticked higher in October, but remains on a cooling trend. All other major components in the core inflation basket showed easing price pressures. Overall, the print supports our call for the Fed to deliver a 25bp cut in December. Moreover, a series of Fed speakers was on the wire, all expressing uncertainty over where rates ultimately would settle.

In politics, the US Republican party secured the 218 seats required to control the House of Representatives. This officially confirms the very widely anticipated red sweep as the GOP now controls the House, the Senate and the Presidency.

In Germany, the country’s biggest industrial union, IG Metall, reached a new wage agreement with employers. The new agreements include a wage increase of 2.0% in 2025 and 3.1% in 2026 plus a one-off payment of EUR 600 in 2025 (down from EUR 1,400 in 2024). The low increase for 2025 reflects weaker bargaining power in German industry. With 3.9 million members, IG Metall’s deal sets a key low benchmark for other sectors and may also influence the ECB’s December staff projections for wage growth next year, supporting the case for back-to-back rate cuts in 2025. However, the employment situation in German industry is relatively weak, meaning that its impact on aggregate euro area wage growth could be lower than usual. In 2026 real wage growth in Germany is expected to markedly rebound as the collective agreement also includes an 8pp increase in the supplementary payment, benefitting lower-wage groups most. While wage growth has been elevated in the recent period, we believe elevated wage growth concerns have become smaller for the ECB.

In Sweden, the Rikbank’s minutes from the November meeting suggested that the board see balanced risk to their inflation forecasts and that upside risks to inflation stem primarily from a weaker SEK and food prices.

In crypto space, Bitcoin continued its upward trend, breaching USD 90,000 for the first time ever during yesterday’s session spurred by Trump’s election win last week. Prior to his victory, Bitcoin was hovering around USD 70,000. As of this morning, it is trading around USD 89,840.

Equities: Global equities were marginally lower yesterday with the US once again outperforming, although not to the same extent as in the first days after the US election. The Republican party surpassed the 218-line for the House of Representatives. Hence, we can now firmly conclude the red sweep, although nine districts still need to be decided.

Despite equities moving slightly lower yesterday, we observed the VIX index drifting lower. While not being overly controversial, it still suggests to us that investors are rather confident about the economic outlook, and we are seeing opinions converging. We would not be surprised to see surveys soon indicating that investors are aligning in terms of risk levels, regional, sectoral, and style allocations. In the US yesterday: Dow +0.1%, S&P 500 +0.02%, Nasdaq -0.3%, and Russell 2000 -0.9%. Asian markets are mixed this morning. The same could be said about Western market futures, with European futures being higher while US ones are slightly lower.

FI: European rates traded in a very tight range yesterday, with 10y bunds in a 4bp high-low range. The US CPI sent short-end US bond yields sharply lower, albeit it was short lived. By the end of the trading session the US yield curve steepened in both the 2s10s and the 10s30s segments. After a couple of days with ASW-spreads trading in positive territory, the Bund-spread went negative again yesterday amid significant supply. ECB’s Kazaks argued for a measured pace in rate cuts and highlighted that the Q3 GDP print made him less concerned with the labour market situation.

FX: Despite details leaning to the softer side, a renewed leg of broad dollar strength followed yesterday’s US CPI. EUR/USD is consolidating at year-to-date lows below 1.06 whereas USD/SEK is challenging previous 2024-highs around 11.00. EUR/SEK and EUR/NOK both kept within previous ranges, but NOK/SEK edged slightly higher. The sterling fared second best within G10, holding steady versus the dollar on the day and strengthening slightly versus the euro. USD/JPY is back above 155 for the first time since the last round of Japanese FX interventions in mid-July.

Markets

US October inflation figures printed bang in line with expectations. Headline inflation picked up to 2.6% and core inflation matched September’s 3.3% with clear signs of price stickiness in housing-related costs (0.4% m/m) and core services ex housing. The latter rose 0.31% m/m and accelerated on an annualized three-month rolling average to 4.24% – the quickest since April of this year.

US yields fell as much as 12.6 bps at the front in absence of an upward inflation surprise which, according to Fed Kashkari on Tuesday, could have nudged the Fed into pause in the wake of Trump’s election victory. The dust settled quickly and yields eventually lost less than halve of the initial losses at the front while the long end added almost 7 bps. The 10-yr yield escaped from a 13-month long downward wedge to test resistance at 4.47%.

German rates were inspired by Merz keeping the door wide open for reforming the constitutional debt brake when speaking at a business conference yesterday. Merz’ CDU/CSU party is leading the polls ahead of the February 23 snap election. Yields in the country added between 2.8-3.5 bps with Bunds underperforming vs swap. Dollar domination continued on currency markets.

EUR/USD broke below 1.06 (previous YtD low) with an immediate technical acceleration bringing the pair towards 1.056, the weakest level since November 2023. EUR/USD is on track to revisit the 2023 low of 1.0448. The trade-weighted index cracked 106 and moves beyond the April/YtD high of 106.51 in Asian dealings this morning. Dollar and US yield momentum is strong and there is little from the economic calendar’s side that could change that near term.

Fed chair Powell speeches later today but will probably stick to the script of last week on the most important market topic today – Trump policy: “We don’t guess, we don’t speculate, and we don’t assume.” Sterling was better bid after Tuesday’s slide, losing only against its larger Anglo-Saxo counterpart. EUR/GBP returned from an intraday high just south of 0.835 to 0.831. The UK calendar is empty but for a speech by Bank of England governor Bailey at the Mansion House. He shares the stage with Chancellor Reeves. UK Treasury said Reeves’ debut address would “set out how we will support our world-leading financial services sector to grow, innovate and finance growth around the country”.

News & Views

The Australian labour market shows tentative signs of cooling in October but without endangering the broader healthy picture. Monthly job growth erased from a very strong 61.3k in September to 15.9k in October. The Australian Bureau of Statistics analyses that the 0.1% increase was the slowest in recent months. Over the previous six months employment rose by an average of 0.3% per month. The unemployment rate for the third month in a row printed at 4.1%, about 0.6% higher compared to the 3.5% of June 2023, but still 1.1 ppts below the March 2020 level when it was 5.5%. The number of unemployed people was 67k higher compared to a year ago, but still 82k lower compared to the March 2020 reference. With population growth in October outpacing the small rise in employment and unemployment, the participation rate fell slightly to 67.1% (from 67.2%). The report won’t change the RBA assessment that its too early to ease policy any time soon. Markets currently discount a first rate cut by summer next year. The Aussie dollar nevertheless continues to suffer from broader USD strength with AUD/USD falling below the 0.65 big figure (currently 0.647).

Eurex Clearing has postponed the introduction of a futures contract tied to European Union debt, Bloomberg reported yesterday. The launch was originally planned for this year. However, in comments to Bloomberg, Eurex indicated that it was a key prerequisite that the EU bond program becomes sustainable and of a long-term nature beyond 2026. After stepping up issuance during the pandemic, the EU currently has no concrete plans to issue bonds raising the volume of debt beyond 2026. The exchange indicated it wants to see new debt beyond 2026 to support a 10-y futures contract.

Source: KBC Bank

Some relief from consensus US CPI reading, but still too high

The market was clearly concerned that the US CPI numbers might have been worse, as evidenced by the drop in yields following a broadly consensus outcome (though slightly different from the whisper number).

Nonetheless, the 3.3% year-on-year core CPI remains an ongoing discussion point, as it is still too high. Federal Reserve Chair Jerome Powell referenced this at last week’s press conference. Despite this, the front end of the curve moved lower as markets perceived more room for potential Fed rate cuts if deemed necessary.

We want to be a tad bullish on USTs due to the Trump-induced backup in rates, which is now significant. But we need a catalyst first. Yesterday's number was a relief as it could have been worse. Historically, we’ve never seen a rate-cutting cycle where the 10-year yield consistently rose after the first cut. Some increase is expected, but not a persistent one like we’re seeing now. We understand the reasons behind this, but it still feels like yields could move back down for a while.

The front end in particular looks to have value. We struggle to understand why it’s persistently drifting higher unless the market is pricing in rate hikes in 2026. Not impossible of course. But quite a leap to discount that now.

Euro rates looking at US and ECB speakers for direction

Euro rates changed slightly on the day but found some relief in the consensus US CPI numbers. With little eurozone macro data to work with and Trump-related risks moving to the background for now, we expect the correlation with US rates to remain strong.

Perhaps European Central Bank speakers can give some direction by sharing insights on the chances of a 50bp cut in the near future. For now markets price in a 20% chance of a 50bp cut in December, which seems reasonable given the rising growth risks. Having said that, more signs of economic weakness are needed to move that needle towards a higher probability.

Bund spreads over swaps remain in a precarious situations

Wednesday saw another day of noticeable Bund underperformance relative to swaps. The 10y yield rose to 4bp above swaps but retreated from the 5bp level it briefly reached last week. Last week, we suggested that some stabilisation might be possible based on historical levels versus OIS. We are now largely back to pre-QE levels, which were around 20bp above OIS in 2014 (on an ESTR-adjusted basis), compared to the 17.5bp peak seen in recent days. However, it is important to emphasise that, overall, we see few reasons for Bunds to outperform swaps again.

One issue that markets will have to weigh is how any new government in Germany will handle the debt brake, and for now there are good cases to be made for more spending to tackle Germany’s investment backlog and structural issues. In the end, Germany may well be one of the countries that can afford such spending. Stabilising at around current levels looks possible, but in terms of market sentiment and other structural as well as cyclical factors playing into the Bund spread, the risks of more underperformance versus swaps seem more obvious than those for outperformance.

10y Bund spreads versus OIS are back to pre-QE territory

Source: Refinitiv, ING

Thursday’s events and market views

US PPI numbers are scheduled for release, and since they influence the PCE reading in two weeks, markets will be sensitive to any surprises. With core CPI running hot, a softer PCE reading of 0.2% (as currently expected) would be welcomed. Additionally, US jobless claims might attract attention as the focus on the labour market increases. In the eurozone, we will see the second GDP estimates for the third quarter and industrial production figures for September. The ECB will also release the minutes of the October meeting. Central bank speakers include the ECB’s Schnabel, the Fed’s Powell, and the Bank of England's Bailey.