In focus today
Tonight, FOMC will release the minutes from its September meeting. Markets will focus on any clues regarding the expected size of rate cuts aat the coming meetings.
Economic and market news
What happened overnight
The Reserve Bank of New Zealand (RBNZ) lowered interest rates by 50bp from 5.25% to 4.75%, which was nearly fully priced in the market. RBNZ still views monetary policy as being restrictive even though inflation has returned to the target rate. This message could signal potential further rate cuts going forward, which made NZD/USD drop around 0.7% from 0.613 at the announcement to around 0.609 this morning.
Chinese stocks fell on Wednesday in the onshore market ending a 10-day streak of positive returns. The Shanghai composite index is down over 5% this morning compared to Tuesday’s closing price The onshore market was closed for longer during the week-long holiday, though, and has mainly played catch-up with offshore stocks after opening again. Hence the big decline today mostly reflects the sharp 10% sell-off in offshore stocks on Tuesday. Today offshore stocks declined further but by a more moderate 1.5%. The sharp correction in Chinese stocks follows a press briefing yesterday from the National Development and Reform Commission, which disappointed by not providing any details on fiscal stimulus as widely anticipated after the strong stimulus package announced ahead of the holiday. NDRC said the Chinese government is fully confident that it will reach its economic and social development goals for this year (5% growth) and said that some of the 2025-budget will be issued this year to support projects. The anticipation in the market is that more details on stimulus will be given later this month, which we also expect.
What happened yesterday
In Sweden, the new flash CPI for September came in marginally higher than expected. CPIF grew 1.2% y/y and CPIF ex energy at 2.0% y/y. We expected CPIF at 1.14% y/y and CPIF ex energy at 1.94% y/y in line with consensus and one tenth above the Riksbank’s forecasts. Hence the print was higher than Riksbank forecast, so overall the print supports for our 25bp cut forecast at the next meeting.
In the Middle East, Israel’s military said that it had deployed a fourth army division into Lebanon, which signals an expansion of the ground offensive against Hezbollah. Prime minister Netanyahu further claimed that the Israeli military has “eliminated” the successor leader of the Hezbollah movement after Nasrallah who was killed only two weeks ago in another attack by Israel.
In the US, NFIB Small Business Optimism index moved slightly higher in September to 91.5 from 91.2 in August. Firms reported less trouble finding new workers and a slight increase in hiring plans. Declining share of firms also report sufficient quality of available labour as their most important problem (which is still inflation for the largest share of businesses). Outlook for expansion, credit conditions and price plans remained steady. General uncertainty index reached its all-time-high, but the level is still comparable to the months leading up to 2016 and 2020 elections (= not alarmingly high). Overall, NFIB supports the notion that US economy remains on a steady footing for now.
Fed’s Kugler (voting member), spoke about monetary policy, and said that she is ready to vote for further monetary policy easing if inflation continues to decrease.
In Germany, industrial production came in higher than expected at 2.9% m/m (consensus: 0.8% m/m, prior: -2.4% m/m) in August, on the back of especially higher production in the automotive industry.
ECB’s Nagel spoke about monetary policy and said that he is open to considering another interest rate cut. This is interesting since Nagel has traditionally been considered too be an inflation hawk. Nagel said that ECB is clearly on the way to the 2% inflation target.
Oil prices slipped back. Weak demand, a stronger USD and lack of retaliation so far from Israel against Iran are likely the main reasons. We think oil prices will stay range bound close to USD 80/bbl as a rising geopolitical premium offsets weaker demand and stronger USD.
Equities: Global equities were higher yesterday, driven by a lift in US markets. Performance, both absolute and relative between regions, turned more or less upside down versus Monday, tempting one to declare a status quo. However, that is not entirely the case. Indeed, yields halted their upward trajectory, but utilities and REITs were significant underperformers again yesterday, while banks and tech ensured that both value and growth sectors performed adequately yesterday. Despite the multitude of factors at play these days, when we summarise the developments over a few weeks, we observe a generally positive reaction to the robust labour market data, including what we see in relative sector and style performance. It may also be pertinent to mention the performance of energy stocks yesterday; a glance at the oil price provides insight into the significant underperformance in that sector.
In the US yesterday, the Dow closed up by +0.3%, the S&P 500 by +1.0%, Nasdaq by +1.5%, and the Russell 2000 by +0.1%. Chinese markets are in focus again this morning. However, today they are experiencing negative performance, with both Hong Kong and especially mainland markets down sharply. The rest of Asia is higher, following the positive session on Wall Street yesterday. US futures are marginally lower, while European markets are mixed despite the uptick late in the US cash session yesterday. With fading optimism in China, there is also a negative impact on European exporters, particularly affecting high-end consumer brands.
FI: There were modest movements in global bond yields yesterday. 2Y and 10Y US Treasuries was trading in a tight range around 4%. We saw a similar picture in European government bond yields where there were also movement in yields. The Schatz-spread once again tightened, and we expect it will continue to tighten like the Bund ASW-spread. We still expect that the Bund ASW-spread will go towards 20bp before year-end.
FX: EUR/SEK ended the day fairly stable with a slight topside surprise to Swedish flash inflation data failing to provide support for the SEK. EUR/USD traded in a tight range with focus shifting to the release of inflation data tomorrow.
