In focus today
From the US, October retail sales and industrial production data will provide markets with the latest hard evidence of the health of the US consumer and manufacturing sectors. We expect that with still positive employment and solid wage gains, retail sales should remain on a steady growth path over the coming months.
In the euro area, the European Commission publishes its economic outlooks for 2025 and 2026. It will be interesting to follow their changes in projections as a signal of what we can expect from the ECB at their new projections in December, which will guide the monetary policy.
In Sweden, SCB publishes the October results from the Labor Force Surveys. While a further increase cannot be completely ruled out, we anticipate peak levels will be reached soon, and unemployment should start decreasing during next year. Importantly, the monthly unemployment figures should be assessed with caution due to their relatively high volatility.
Economic and market news
What happened overnight
In China, the monthly batch of data for October gave a mixed picture. Growth in retail sales exceed expectations at 4.8% y/y (cons: 3.8%, prior: 3.2%), reflecting how the country’s recent stimulus efforts are kicking in. Conversely, industrial production and fixed asset investments fell short of expectations, printing 5.3% y/y and 3.4% y/y, respectively (cons: 5.6%, 3.5%). New home prices dipped 5.9% y/y, sliding the most in annual terms since October 2015. The monthly figure, however, fell 0.5% m/m, compared to the decline of 0.7% in September, signalling that stimulus measures are starting to support the fragile housing sector.
In Japan, GDP growth for Q3 matched consensus, growing a modest 0.2% q/q SA following the 0.7% rebound in Q2. Private consumption was stronger than expected, whereas capital spending and net external demand (exports minus imports) fell 0.2% q/q SA and 0.4% q/q SA, respectively. The decline in net external demand particularly stood out compared to consensus of 0.1% q/q SA growth.
What happened yesterday
In the US, yesterday’s data releases had limited market impact. Akin to CPI on Wednesday, October PPI was very much as expected, increasing in October, with headline and core at 0.2% m/m SA and 0.3% m/m SA, respectively. While jobless claims edged slightly lower to 217k, the move was nothing too dramatic.
Fed Chair Powell stressed that the economy is not yielding any signals that the Fed should be in a hurry to slash rates. At the same time, Powell highlighted that the current sound economic backdrop gives the Fed time to approach their decisions carefully, hinting that the Fed likely will cut rates gradually, with inflation coming closer to the 2% target, “but not there yet”. We pencil in a rate cut of 25bp cut in December.
In the euro area, industrial production declined by 2.0% m/m in September (cons: -1.4% m/m, prior: 1.5%). Given that the data is quite volatile on a monthly basis and this month was driven by a downtick in Ireland of 11%, we focus more on Q3 as an average. In Q3, industrial production declined 0.3% q/q, highlighting that industry remains weak, likely dragging on activity. The outlook for the coming quarters remains bleak and we do not expect a recovery in the sector before H2 2025 when interest rates likely have declined further.
Euro area employment continued to grow in Q3, increasing 0.2% q/q compared to a downward revised 0.1% in Q2, albeit when judged on the second decimal it was broadly unchanged (from 0.15% to 0.18%). Hence, the euro area labour market remains resilient. The employment situation is heterogeneous across euro area countries. The strength is due to continued increases in employment in Spain, while the picture in Germany is very different with employment declining in Q3. However, we see clear risks of the labour market weakening in the quarters ahead. We expect aggregate euro area employment growth around 0.0-0.1% q/q in the coming quarters as the EU Commission employment expectations index indicates continued mildly positive employment growth in Q4 and indicators of services demand remain positive. The outlook for the euro area is driven by our expectations for employment gains in Southern Europe countered by employment declines in Germany. We see risks as tilted towards the downside due to the weak manufacturing sector, as indicated by the weak wage agreement in German IG Metal for 2025.
Minutes from the ECB’s October meeting indicated that risk management considerations were central to its decision to cut rates by 25bp to prevent unnecessary economic strain. Policymakers emphasised that the risks of cutting in October and potentially being too early in the easing cycle were lower than the risks of waiting and potentially acting too late. It was also highlighted that the ECB could pause its cutting cycle in December if activity improves. We believe that the ECB will deliver another 25bp cut in December, bringing the deposit rate to 3.00%.
In Sweden, the final inflation data for October was in line with last week’s flash estimates. Decomposing details, the upside deviation seemed to be more broad-based than we had expected and not fueled by higher food prices. There were no worrying developments in the data, however.
Equities: Global equities were lower yesterday, albeit with significant regional variations. European stocks outperformed their US counterparts by approximately 2%, on a day when macroeconomic fundamentals did not provide any material reasons for this divergence. Additionally, the long end of the bond market was more or less moving in sync, and dollar continued to strengthen. In our opinion, this relative movement is a result of some reversal of the massive outperformance the US has demonstrated recently. Indeed, the US has displayed superior macroeconomic and microeconomic data, but not enough to justify the US outperformance we have seen. Hence, the Trump victory/trade has simply caused investors to flock to the US. This trend can be observed in both positioning and flow data, but the real alarm is sounded by relative valuation. Following the post-election movements, the US premium to Europe reached 65% based on a 12-month forward P/E ratio. To put it in perspective, when Trump was elected president back in 2016, the premium stood at 14%. With the movements in equities yesterday, individual stock performance, and for that matter, crypto currencies, it seems that we have put the largest part of the Trump trade behind us. Hence, going forward, both absolute and relative performance should again increasingly be driven by fundamentals. Some of the most extreme Trump trades are also prone to reversal.
In the US yesterday: Dow -0.5%, S&P 500 -0.6%, Nasdaq -0.6%, and Russell 2000 -1.4%.
Asian markets are quite varied this morning, though the major markets are leaning higher. European and US futures are lower.
FI: Global yields generally declined yesterday with the 10y point in Germany down about 8bp. Late in the evening, Powell’s remarks on the Fed being in “no hurry to lower rates” spurred a sell-off in USD rates wit 2y treasuries rising 10bp to 4.35% and markets taking out 5bp of December Fed cut pricing. European markets are expected to see some spillover this morning.
FX: Powell’s remarks on the Fed being in “no hurry to lower rates” spurred a second wind for the USD during US hours where EUR/USD briefly touched below 1.05. Scandies recovered some of the previously lost ground vs the euro and NOK/SEK kept above 0.9850 throughout the session. USD/JPY continues to edge higher whereas EUR/GBP defied otherwise elevated G10-volatility and traded remarkably stable between 0.8310-0.8320.
