In focus today
From the US, NFIB’s Small Business Optimism index is due for release for September. Markets focus especially on employers’ perception of labour market conditions. Fed’s Bostic will speak this evening.
In Sweden, we receive preliminary inflation figures. We expect CPI, CPIF and CPIF excluding Energy to print 0.2% m/m and 1.6% y/y; 0.3% m/m and 1.1% y/y; and 0.3% m/m and 1.9% y/y, respectively. Our prediction for CPIF is 0.1 percentage points higher than the Riksbank’s forecast and CPIF ex energy is spot on. The flash estimate will include only the monthly and annual changes, reserving the detailed breakdown of components for the regular release.
In Germany, we look out for the industrial production data for August. Industrial production has been on a declining trend for the past year and survey data suggests the weakness persisted in August. The hard data on production in Germany will be important for the growth assessment which continues to look bleak.
On the night of Wednesday, we expect the Reserve Bank of New Zealand (RBNZ) to cut the Official Cash Rate by 50bp. Analyst consensus is divided between 25bp and 50bp moves, but markets have almost fully priced in the larger cut.
Economic and market news
What happened overnight
In China, the chairman for the National Development and reform commission said that the Chinese government is fully confident that it will reach its economic and social development goals for this year and said that some of the 2025-budget will be issued this year to support projects. Since late September the government pushed economic stimulus package to support the economy. The key to turning the Chinese slump is to put a stop to the housing crisis, which we see as the epicentre of current challenges. We now look for a gradual improvement in housing over the next year but not a fast rebound. Last week we revised up our Chinese growth forecast from 4.8% to 5.2% in 2024, see Research China – Lift to GDP forecast after leaders draw line in the sand, 2 October. Investors were disappointed by the lack of detail in the plans and offshore stocks corrected sharply lower by more than 5%. However, it follows a strong rally of close to 40% in two weeks.
What happened yesterday
In the Middle East, fighting between Hezbollah and Israel intensified yesterday, one year after Hamas attacked Israel on 7 October last year. Hezbollah said it targeted a military base south of the Israeli city Haifa with missiles. Israel confirmed the attack. We are yet to see Israel’s counter-attack to Iran’s missile barrage a week ago. Israeli response is likely to determine the course forward in the conflict.
In the euro area, the investor morale measured by the Sentix index increased in October, after a decline the previous three months. Despite the increase investor morale is still at relatively low levels.
In Germany, factory orders fell more than expected, hinting that German manufacturing sector is not set to recover in the coming months. Orders fell 5.8% (consensus: -2%, prior: 2.9%). Later today, it will be interesting to see how industrial production performed in August in the light of the disappointing order flow.
Equities: Global equities, or to be more precisely, US equities were lower yesterday, dragging down global indices. Conversely, European, Far Eastern, and Japanese markets were all higher. Examining the sector returns from yesterday provides a clear insight into the prevailing market dynamics. During a sell-off session, with utilities performing the worst, one typically needs to consider the bond market, where the hawkish repricing of the Fed continued. Additionally, a soaring oil price and the US election now less than a month away contributed to the rising uncertainty, pushing the VIX towards the 23 level. Thus, the US election might well be a “sell the rumours, buy the fact” event. The main US indices yesterday were as follows: Dow -0.9%, S&P 500 -1.0%, Nasdaq -1.2%, and Russell 2000 -0.9%. This morning, a stock price bonanza is continuing in China. With the conclusion of the Golden Week trading holiday, mainland shares are soaring (up around 5% at the time of writing). The flipside is that H-shares in Hong Kong are down 5%, as the Chinese authorities have not yet followed up with stimulus measures post the Golden Week holiday. European futures are down significantly this morning, catching up to the US’s late cash action yesterday. US futures are close to flat.
FI: The repricing of monetary policy expectations continued Monday as global bond yields continued to rise on the back of the stronger-than-expected US labour market data last week and rising oil prices. Hence, the US curve flattened from the short end with 2Y Treasuries rising some 8bp, while 10Y and 30Y Treasuries rose 5-6bp. We saw the same picture in the Europe with rising bond yields, but where the periphery underperformed modestly the core-EU especially in the front end of the curve as the Schatz ASW-spread widened some 2bp.
FX: EUR/USD has been consolidating just below the 1.10 mark in a quiet start to the week, with the broad USD index showing little change after its best week in two years. EUR/GBP moved higher with the KPMG/REC report showing further signs of wage growth cooling and softness in the labour market. Yesterday’s slightly more expansionary than expected fiscal budget in Norway, the global rates-environment and higher oil prices contributed to a substantial rise in short-end NOK rates which in turn lifted NOK FX. NZD/USD continued to edge lower yesterday ahead of Reserve Bank of New Zealand’s (RBNZ) rate decision early tomorrow morning.
