The dollar continued its October rally, and yields edged higher this week. The moves reversed somewhat by the end of the week, as investors maybe questioning the sustainability of the recent sharp rise in US rates. Oil prices retraced some of the decline from recent weeks which weighs on energy-importing currencies such as euro and yen. The latter has been the big loser in October in general amid the moderation in the Fed pricing as US recession fears have been placed on the back burner.
The modest growth trajectory in the euro area continues with the October composite PMI at 49.7 on the back of a weaker-than-expected service sector and a stronger-than-expected manufacturing sector. Interestingly, German and French employment indices are now below 50 in the service sector for the first time in four years. That said, the two dominating economies are also the weak links in the euro area. The French service sector in particular pulled activity lower, but since we compare to a September with Paralympics in Paris, the world’s third largest sporting event, we think markets should have been less surprised by the weak service print. German data was better than expected with a reaccelerating service sector and manufacturing increasing from very low levels. Ifo data also confirmed the encouraging German signs with both the current assessment and expectations moving higher, although from very low levels.
Largely the data aims with gradual ECB easing as we see it. That said, it does not keep investors from pricing in a growing probability of a jumbo cut in December and even a hawk such as Dutch governing council member Klaas Knot would not rule it out when speaking this week.
The coming week will be eventful. In the euro area, we will look out for inflation and Q3 GDP. In the former, gauging service price momentum will be key following a marked slowdown in September. We suspect it was mainly a blip and expect service price momentum to pick up again. We expect 0.2% Q3 GDP-growth supported by Southern Europe and the Olympic Games in France.
We also get a fan of key data releases from the US. On the labour market, we will look out for the number of job openings in the JOLTS report, which is an important measure of labour demand for the Fed. We think nonfarm payrolls growth slowed down to 130k (Sep: 254k) both due to weather-related distortions and less favourable seasonal adjustment. We expect Q3 GDP-growth of 2.5% on annualized Q/Q basis (Q2: 3.0%).
In Japan, we will keep an eye on the general election on Sunday. Polls have indicated the ruling coalition is in danger of losing its Lower House majority. This could compromise the backing for further rate hikes from the Bank of Japan (BoJ). That said, the largest opposition party, which has refused to enter the coalition, has a more hawkish stance on monetary policies, so the consequences for potential rate hikes down the line are not clear. We still look for another rate hike in December or January, but we expect the BoJ to stay on hold on Thursday.
