Market movers today
Today we get US ISM manufacturing PMI. Consensus sees a decline to index 50 after the weaker than expected Markit PMIs last week.
We also get PMIs out of Sweden and Norway and in Denmark it is Election Day, see more below.
The 60 second overview
Double-digit inflation: Euro area HICP inflation jumped to a new high at 10.7% y/y in October (from 9.90% y/y in September). The higher print was driven by an increase in energy, food and core inflation. Energy inflation rose to 41.9% (from 40.72% in Sep) as the pass-through of higher gas/electricity prices continues in most countries, more than off-setting the negative base effects that are weighing on fuel prices and German VAT cuts for gas and district heating. Food price inflation (13.1% from 11.76% in September) also showing no signs of moderating yet, despite farm-gate and wholesale market prices pointing to an approaching peak.
Core inflation rose further (5.0% from 4.75% in September). Country figures suggest the increase was broad-based, even for ‘luxury’ services like recreation, hotels and restaurants, airfares and package holidays. For goods, strong momentum is still visible for non-durable goods price especially, as companies continue to pass on higher input and energy costs and selling price expectations showed no signs of peaking yet in October.
Euro area GDP still growing in Q3: Euro area GDP expanded by 0.2% q/q in Q3 (after 0.8% q/q in Q2). Lower post-pandemic pent-up demand in services led to noticeable cooling of the growth pace in Italy and Spain from the summer, while – despite the record-high gas prices – Germany’s economy (+0.3% q/q) is weathering the economic storm better than expected.
Despite sky-high inflation and a worsening energy crisis, country figures suggest private consumption remained fairly resilient during Q3. The delayed energy pass-through, pandemic savings and fiscal mitigating measures probably helped keep a hand under domestic demand, while a decent order backlog coupled with easing supply constraints in manufacturing still support export performance near-term. The ongoing euro area recovery is a welcome positive surprise, especially for countries such as Spain, which has yet to reach pre-pandemic GDP levels. But we still think it will be difficult to avoid a recession during the winter, amid slowing industrial activity, while domestic demand should increasingly feel the impact of falling real disposable incomes and higher borrowing costs.
Australia rate hike: Overnight the RBA hiked its policy rate by 25bp to 2.85% and signalled more tightening ahead. Importantly, the decision underlined the move or pivot last month away from large rate hikes. The rate hike was expected, but still worth keeping an eye on as RBA is one of the first G10 central banks to have moved away from big rate hikes as it has started to put more focus on the recession risks despite high inflation. That said, one should remember that RBA meets every month making it easier to move in small steps. Norway is another central bank that has started to focus more on the outlook for growth. Hence, we expect a similar move like the RBA to a smaller 25bp rate hike on Thursday from 50bp in September.
Equities: Global equities lower yesterday led down by US and tech with most other regions higher. Defensives outperforming with health care and energy the only two sectors higher. Tech, media struggling, and small caps outperforming. In US Dow -0.4%, S&P 500 -0.8%), Nasdaq -1.0% and Russell 2000 -0.00%. Optimism is coming back this morning with Asian markets higher across the region while also European and US futures are higher.
FI: European rates did not react to the record-high inflation print, however, the print confirms to us, that making firm conclusions of an inflation peak is too soon, and thereby the ECB pivot as a market theme is too early. As a result rates sold off by 4bp in core countries while the Italian-German spread widened 9bp yesterday after flirting with the 200bp level last week. Bunds currently stand at 2.14%.
FX: USD rebounded further on broad basis yesterday. EUR/USD dropped below 0.99 and USD/JPY rose above 148. Scandies were broadly stable vis-à-vis EUR yesterday.
Nordic macro
Sweden: Yesterday, Industrial unions in Sweden informed on their demand for a 4.4% wage increase for the coming year. Historically, outcomes ended up at roughly 75% of the demands, implying c.3.3% this time around. The week before Christmas the industrial employers will respond to the requests with their number.
Swedish PMI manufacturing numbers for October will be released today (CET 8:30) where a continued drop below the 50-threshold is expected.
Norway: Based on the deterioration in global PMIs in October, we expect the Norwegian PMI to drop below 50 for the first time since August 2020. Also, keep an eye on the employment index, as the demand for labour has been surprisingly strong.
Denmark: There is a general election in Denmark today. Polls point to a result where negotiations to form a new government will be difficult and possibly lengthy. There appears to be broad agreement about the macroeconomic framework among the main parties, so there should be no near-term market impact.
