Market movers today
Today’s main event is the euro area flash HICP. The inflation number is particularly interesting given that euro area growth slowed to a four-year low yesterday and Draghi’s insistence on inflationary pressure last week. Ergo stagflation. Since April, headline inflation has been close to the ECB’s target (below but close to 2%). We expect the October numbers to increase slightly to 2.2% y/y driven by higher energy prices and much more importantly, higher core inflation. We expect a pickup in core inflation to from 0.91% to 1.09% on the back of higher service price inflation.
Overnight, Chinese Caixin PMI manufacturing is due. The number will be followed closely as it dropped to 50.0 in September and a further decline would take it below the 50 level.
Selected market news
The US equity market rebounded yesterday amid yet another volatile session. As of this morning, S&P 500 futures and Asian equity markets are in the black. Treasury yields and the dollar gained.
This morning, the Bank of Japan (BoJ) kept its monetary policy unchanged. The policy rate and the yield target on 10-year Japanese government bonds was maintained at -0.1% and 0% (+/-20bp), respectively. The decision was made by a 7-2 vote. The BoJ also maintained its forward guidance and left its asset purchases unchanged.
We expect the BoJ to keep its current policy intact until the end of 2019 at least. As we had expected, the BoJ revised down its inflation forecast from 1.1% back in July to 0.9% for FY 18 – so business as usual here. The growth forecast for FY 18 was also cut slightly from 1.5% to 1.4% and risks on the outlook for economic activity and price development are skewed towards the downside. In the current situation, the BoJ is likely to continue to maintain a very accommodative monetary policy for a long period of time.
Yesterday, euro area Q3 GDP growth came in at a four-year low of 0.2 % below consensus and our expectations (0.4%). In the absence of a component breakdown, we expect that growth was primarily driven by domestic demand in light of lingering external headwinds on the trade front. In terms of country composition, weaker activity was likely to have been driven primarily by Italy and Germany, and could not be fully compensated for by an acceleration in the French Q3 growth rate.
We lower our 2018 euro area GDP growth forecast to 1.9% based on weak data, but we still look for a small rebound in Q4 to 0.4%, primarily on the back of a recovery in German activity as production bottlenecks in the car industry subside. We do not think the data will ring alarm bells at the ECB as growth remains above potential (1.5%), but it strengthens the case for a downward revision of the GDP growth forecasts at the December meeting.
