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After the Elections

First, Spain, France and Germany revealed better-than-expected growth numbers in Q3. Germany even eked out an unexpectedly positive figure, which certainly helped – I wouldn’t say ‘to improve’ the mood but – to prevent sentiment from getting worse in the midst of a jungle of bad economic news, there. VW posted its least profitable quarter since the pandemic but said that they could avoid factory closures IF the workers accepted a 10% decrease to their salaries and the German unemployment change came in almost double the expectations, but seeing the German economy eke out that 0.2% advance in Q3 was a good surprise.

Now, the encouraging GDP figures came in with a cost: inflation in Spain and Germany came in higher than expected. Inflation in Germany crossed past the European Central Bank’s (ECB) 2% target and reached 2.4% in October.

The aggregate CPI update for Eurozone, due this morning, is expected to brush up against the 2% target. The combination of better-than-expected growth and higher-than-expected inflation weighs on accelerated rate cut expectations from the ECB. And the latter is positive for the euro. This is why the EURUSD tested the 1.0870 resistance, which matches the minor 23.6% Fibonacci retracement on the September to October selloff and the 200-DMA, but couldn’t clear it.

And the reason why it couldn’t clear it is because mixed data came in from the US. There, the GDP update came in slightly softer than expected, at 2.8% versus 3% printed previously, but consumer spending jumped from 2.8% to 3.7% defying the rising credit card debt and delinquencies, and more importantly, PCE prices fell to 1.5%, and core PCE prices fell less than expected but printed 2.20% – which now is very close to the Federal Reserve’s (Fed) 2% policy target. The September core PCE index is due today and is expected to show a further slowdown as well.

Soft landing: Achieved?

With the current data that we have in hand, some investors now argue that the Fed already achieved the soft landing that it was dreaming of. As such, the US dollar was weaker yesterday because the softening price pressures could allow the Fed to continue its rate cuts, but the downside remained limited because the data suggests that the cuts could be moderated. The ADP report showed yesterday that the US economy added 233K new private jobs last month, more than the double of 110K expected by analysts and was stronger than the number printed a month earlier. Of course, Friday’s official data will say the last word but Friday’s figures could also bring some positive surprises if the Boeing strike and hurricanes had a lighter than expected impact on the numbers. We will see.

For now, the US dollar remains bid despite yesterday’s weakness, the 2-year yield spiked higher – as the Fed doves scaled back their Fed cut bets. A 25bp cut at next week’s FOMC meeting remains on cards. The probability assessed to that is around 96%. But the Fed is not seen repeating the 50bp cut anytime soon.

Budget was …ok

In the UK, the budget day couldn’t give the pound the energy it needed to clear the 1.30 offers. The announcement went as smoothly as it possibly could – given the amplitude of the bad news. Reeves said that the country will raise taxes by £40bn pounds to boost spending on public services. The UK also announced earlier that they would boost gilt sales by almost £20bn this fiscal year. But the spending would be less than expected by the market. That brilliant management of expectations helped traders keep their nerves together. The UK’s 10-year yield spiked to 4.40% but the selloff in sterling remained contained as the Bank of England’s (BoE) hopes of seeing further inflation easing in the UK went up in smoke as increased spending pressures are now knocking on the door.

China and Japan

China posted a small but unexpected expansion in its manufacturing sector in October, a piece of news that may have help crude oil extend yesterday’s recovery, and the Bank of Japan (BoJ) maintained its policy unchanged at today’s meeting, as expected, and Governor Ueda pointed out concerns regarding the increasingly uncertain global economic outlook. But the board ‘remains committed to further rate increases if economic and price data align with its forecasts’ and that line capped the upside in the USDJPY limited, and gave some strength to the yen.

Earnings update

Microsoft and Meta released their Q3 earnings yesterday, after the bell, and the results were good. Microsoft posted a better-than-expected quarterly revenue growth, fueled by its cloud computing business and Office – which integrates AI capabilities. But the company projected slower quarterly growth in cloud revenue, highlighting its challenge in bringing data centers online quickly enough to meet the rising demand for AI services. Shares dropped 3.7% in the afterhours trading.

Similar with Meta. The company posted strong quarterly results, improved ad revenue thanks to AI, but the weaker than expected user number in Q3, and the plans to spend more on AI didn’t please investors. The shares fell 3% in the afterhours trading.

Today, it’s Apple and Amazon’s turn to go to the earnings confessional. And they should not only meet and beat expectations but came in with a solid forecast to keep enthusiasm going.

USD: Dollar takes a back seat to overseas events

The DXY dollar index has softened a little this week – largely in response to overseas events. Here the third-quarter eurozone growth data and October German price data were stronger than expected and have prompted the market to scale back expectations of a 50bp ECB rate cut this December.

And this morning we have just seen USD/JPY drop nearly 1% on Bank of Japan Governor Kazuo Ueda's press conference outlining a plan to continue with rate hikes should the BoJ's forecasts be realised. Most recently the market had felt the BoJ would be less likely to hike on the back of uncertain political developments and potentially a more dovish make-up of the Japanese government.

That brings us to the dollar. Dollar strength this month has all been about a market positioning for a Donald Trump win and US rate spreads widening in favour of the dollar as the Rest of the World turns more dovish. Well, it seems that the ECB and BoJ may not be quite as dovish as some had feared – news that could potentially cap the dollar's rally for the time being. Given that background, a sticky core PCE deflator today – the Fed's preferred price gauge – at 0.3% month-on-month may not need to send the dollar that much higher. 

DXY is currently on support at 104.00 and after one-way bullish traffic for over a month, may be due a modest correction to the 103.65 area.

EUR: 50bp from the ECB in December is not a done deal after all

Yesterday was a day for the ECB hawks. German and eurozone data surprised on the upside as did German October CPI. And the influential Isabel Schnabel said the ECB should not rush further rate cuts. This prompted around a 12bp repricing higher in the terminal rate for the ECB's easing cycle and finally saw the two-year EUR:USD swap rate differential narrow, supporting EUR/USD. The same dynamic could be present in the European morning should the eurozone October flash CPI surprise on the upside and again pare back expectations for the ECB rate cut in December. These still stand at 34bp.

EUR/USD could retest yesterday's 1.0870 high on today's European data – but a move up to 1.09030 might be a bridge too far given the pivotal US elections next Tuesday.

GBP: Sterling a little weaker as the dust settles on the budget

Labour's large tax-and-spend budget – described by some as an "old Labour" policy – is still reverberating across UK asset markets. Sterling briefly got a lift yesterday on the view that the budget was stimulative and that the Bank of England easing cycle would need to be repriced higher. However, as our UK economist James Smith concluded in his budget review piece, we suspect the BoE is unlikely to be swayed by the government's budget plans and we see the risk that yesterday's spike in short-dated sterling interest rates gets reversed.

At the same time, it looks as though Labour is sailing very close to the wind with its borrowing plans – with new Gilt supply coming dangerously close to £300bn for FY24/25 and FY25/26. EUR/GBP should be trading a little lower based on short-dated rate spreads and the reason it is not is probably because a modest fiscal risk premium is going back into sterling. Should eurozone CPI surprise on the upside today, EUR/GBP could move closer to 0.8400.

Over the medium term, we are slightly bullish on EUR/GBP because of the market under-pricing the forthcoming easing BoE cycle. And it now seems the UK budget may add to that trend if indeed a modest fiscal risk premium gets priced into the pound. 

CEE: Region remains under pressure

Yesterday's GDP data for the third quarter disappointed, especially in Hungary, confirming a return to technical recession, but the data in the Czech Republic was also slightly weaker, below central bank expectations. Inflation numbers in Poland for October will be published today, the first in the CEE region. Our economists expect a slight pick-up from 4.9% to 5.1% YoY, one-tenth above market expectations. However, core inflation in particular surprised to the upside in September and may get more attention this time.

CEE currencies remain under pressure and we maintain a bearish view going forward. EUR/HUF moved to new highs and traded above 408 for a while yesterday. Weak GDP data did not help the situation and the rates market remains mixed. On the one hand, valuations show significant cheapness of HUF assets, on the other hand, the market is risk-off ahead of the US elections and not much willingness to take too much risk ahead of the risk event. Thus, we do not see much reason for improvement and approaching 410 EUR/HUF seems to be the next test, which could be an uncomfortable level for the central bank.

In Poland, it was only at the end of yesterday's trading that the POLGBs market reflected the surprisingly high deficit increase announced a day earlier and today we could see further reverberations of market fears of higher bond supply, exposing PLN as well. In the Czech Republic, the CNB blackout period starts later today and so far we haven't heard much. That means today is the last chance to see any headlines, but the 25bp November cut seems like a done deal.

In focus today

In the euro area, HICP inflation data for October is released. With inflation data out from Spain, Germany, and Belgium, we track euro area HICP at 2.0% y/y today, above consensus expectations (cons: 1.9%) driven by broadly higher inflation also in core inflation, which we see unchanged at 2.7% y/y (cons: 2.6%). Most importantly, we will see the monthly increase in seasonally adjusted services prices (prior: 0.14% m/m s.a.). For ECB this will help determine if weak momentum continued into October. We also receive the September unemployment rate, which will be interesting following easing labour market dynamics, while unemployment rate has remained record-low at 6.4%

In the US, the Employment Cost Index for Q3 is due for release this afternoon. This is a key measure of labour cost pressures for the Fed. September monthly PCE data will also be released.

The US Presidential election is coming closer, and we will host a conference call on 6 November to give our quick take on the potential market implications of the election: Conference call on the implications of the US election for Global and Scandi markets.

Economic and market news

What happened overnight

In Japan, the BoJ kept rates unchanged as expected this morning but stressed its intention to keep hiking borrowing costs if the economy sustains a moderate recovery. The BoJ will prefer a wait-and-see approach ahead of the US presidential election next week and until the political situation after the ruling coalition lost its majority is more certain. We expect another hike in December, particularly because the BoJ might see it as necessary to support the yen. With inflation on target and consumers’ purchasing power heading slowly in the right direction, there is also an economically sound case for it, irrespective of the yen.

In China, October PMIs showed upbeat signs, with the composite PMI increasing to 50.8 driven by both manufacturing and non-manufacturing activities, which printed 50.1 (prior: 49.8) and 50.2 (prior: 50.0), respectively. This indicates that latest stimulus measures are helping pick up the economy.

What happened yesterday

In euro area, Q3 GDP rose 0.4% q/q beating expectations of a 0.2% q/q increase. The ECB estimated growth at 0.2% q/q in their latest projections, so the data comes as a pleasant surprise. Growth was driven by Spain which recorded a record 0.8% q/q expansion (cons: 0.6%, prior: 0.8%), France that got a boost from the Olympics with 0.4% q/q, and Germany that recorded rising activity of 0.2% q/q due to a downward revision of growth in Q2. However, growth outlook remains fragile as the manufacturing sector continues to struggle with declining activity and the service sector is moderating. The outlook for 2025 is dependent on consumption picking up as real income rises and an improvement in the industry. Currently, we are not seeing this, leaving downside risks to the outlook.

The higher-than-expected data on inflation and growth supports the case and our call for a 25bp cut by the ECB in December against a “jumbo” cut.”

In the US, Q3 GDP figure is mostly in line with expectations at 2.8% q/q SAAR (cons: 2.9%). The increase particularly reflected solid growth in private spending, showing that consumers remain resilient ahead of the US presidential election. ADP employment for October exceeded expectations with +233k (cons: +111k). September is revised slightly higher from +143k to +159k. ADP has usually been a mixed predictor for NFP, so a modest reaction might be reasonable.

In Sweden, we changed our call for the Riksbank meeting next week and we now expect a 50bp cut down to 2.75% (previously 25bp cut). This change follows the release of disappointing growth data earlier this week. The GDP indicator for Q3 reported a decrease of -0.1% q/q. Additionally, both the Riksbank’s company survey and the NIER survey have shown diminished expectations in the business sector. For a full preview ahead of next week’s Riksbank decision.

In the UK, the Labour government released their first budget. In line with our expectation, the budget provided some expansionary measures with funding sourced from large tax increases worth GBP 40bn and the change in debt measure estimated to provide around GBP 50bn. However, and importantly, borrowing is set to rise substantially averaging GBP 36bn each year over the next five years. We have long argued that a more expansionary budget could trim markets expectation for a December cut, which today’s events have provided support for. We continue to expect a 25bp cut in November and an unchanged decision in December.

Equities: Global equities were lower yesterday, driven by disappointing earnings and likely some de-risking ahead of the US election. In our opinion, macro data should not be blamed for the weak development yesterday, as most macro figures were strong, even in Europe where equities underperformed the most. Please also consider bond yields, which were marginally higher, as well as sector and style rotations; cyclicals performed well, quality underperformed, and minimum volatility was flat. This does not suggest a classic negative environment based on growth fears. Apologies for repeating ourselves here; this is expected given the massive number of factors currently at play, plus US election being less than one week away. In the US yesterday, Dow -0.2%, S&P 500 -0.3%, Nasdaq -0.6%, and Russell 2000 -0.2%. Asian markets are lower this morning, with Chinese stocks standing out on the positive side. European and US futures are also lower, led by the tech and growth segments of the indices.

FI: In a choppy session, driven by a heavy string of data releases, we saw yields selling off from the front end in a bearish flattening of the curves. The upside surprise to German inflation data took out 4bp of the jumbo rate cut discussion for December and thus now ‘only’ points to 31bp of ECB rate cuts in December. This combined with higher European growth (and above ECB projected Q3 development), means that a slower and more gradual approach was assessed as the most likely scenario by markets.

FX: EUR/USD trended toward the upper end of the 1.08-1.09 range on the back of euro area data that was better than feared. USD/JPY declined slightly, still hovering around 153 after the Bank of Japan’s anticipated decision to hold the policy rate at 0.25% this morning. EUR/GBP experienced a rollercoaster day in an eventful session for UK markets with the release of the Labour government’s first budget. NOK/SEK continues to move higher, driven largely by relative rate spreads as NOK-SEK spreads reach new wides. EUR/NOK drifted up to 11.90, while EUR/SEK neared 11.60.

Source: Euronews