In focus this week
Today will be quiet on the data front, with no major releases scheduled.
This week is expected to be calm before the storm of US elections, nonfarm payrolls and FOMC meeting all within the first week of November. On Tuesday, the Hungarian Central Bank will announce its rate decision, while investors direct focus on the Bank of Canada and their key policy rate on Wednesday. This week’s main data focus is on the October flash PMIs on Thursday, which will likely signal continuing contraction in manufacturing activity and modest growth in services on both sides of the Atlantic. Tokyo CPI for October is scheduled for release on Friday morning.
Economic and market news
What happened overnight
In China, the one-year and five-year loan prime rates (LPR) were both lowered from 3.35% and 3.85% to 3.10% and 3.6%, respectively, in line with market expectations for additional easing. This comes as China seeks to support growth and stabilize the faltering property sector. The one-year LPR primarily affects corporate loans and most household loans, whereas the five-year LPR serves as a benchmark for mortgage rates.
In the Middle East, hundreds flee as blasts hit Beirut. This occurs as Isreal is preparing to attack infrastructure associated with the financial operations of Lebanon’s Hezbollah group, as warned by an Israeli military spokesperson on the social media platform X.
What happened since Friday
In the US, Nasdaq, S&P 500 and Dow reached their sixth consecutive week of gains, as investors rallied behind tech stocks, with both the S&P 500 and the Dow reaching record closing highs. The rally was in part due to Netflix soaring 11.1% after better-than-expected third-quarter sales, profits, and subscriber numbers.
Moreover, Atlanta Fed President Bostic (hawk and voting-member) was on the wire on Friday, highlighting that he sees no rush bringing the policy rate down to its neutral level and will be patient on rate cuts.
In the UK, retail sales ex auto fuels for September increased 4.0% y/y (cons: 3.1%, prior: 2.2%) with monthly increases also holding up. The reading caused the EUR/GBP to break below 0.8300 for the first time since 2022.
In Japan, on Friday the largest labour union group emphasized that it would seek wage hikes of at least 5% in 2025, as wage gains are yet to “take root”. Going forward, wage negotiations will be imperative to follow to assess the scope for further rate hikes from the Bank of Japan. Inflation has come lower this year, with Bank of Japan’s favourite measure, CPI excl. fresh food declining to 2.4% in September, according to data Friday morning. Hence, the 5.1% wage increase Rengo negotiated in the spring will probably be hard to repeat, but wage growth above 4% will keep the door open for further Bank of Japan hikes.
In the Middle East, tensions are rising following Israel’s reported killing of Yahya Sinwar on Thursday. Following a reported drone attack on Israeli Prime Minister Benjamin Netanyahu’s residence in Caesarea launched by Hezbollah, the Prime Minister said he is undeterred from his war aims. This comes as Israel prepares to respond to Iran’s large-scale ballistic missile attack on 1 October – with Israel’s defence minister saying its response would be “deadly, precise and surprising”. The situation in the Middle East remains a market concern as investors continue to evaluate the size of the Israeli retaliatory attack.
In metals space, gold surpassed the USD 2,700/oz milestone, driven by ongoing global uncertainty, namely the situation in the Middle East, the US election and relaxed monetary policy expectations.
In Oil markets, oil futures declined by more than 7% over the past week, as China’s economic growth slowed. Brent settled more than 7% lower last week and WTI lost around 8%, marking the biggest weekly declines since 2 September, when OPEC and the International Energy Agency cut their forecasts for global oil demand in 2024 and 2025.
Equities: Global equities continued higher Friday and last week. We are not talking about massive increases, but there were still enough gains to secure new all-time highs, with the US increasingly taking the lead. The S&P 500 closed at a fresh all-time high on Friday and logged its sixth consecutive week of gains. The slight optimism was also visible within sectors where cyclicals steadily outperformed defensives last week, again primarily driven by the US. Underneath, there was an interesting sector mix with Utilities and Financials outperforming together, despite yields not being a massive factor last week. Financials were obviously boosted by very solid US bank reporting. It was a tough week for the energy sector as the oil price was down almost 10%. In the US on Friday, Dow +0.1%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 -0.2%. Asian markets are mixed this morning, as are futures in Europe and the US.
FI: EUR rates edged lower through Friday’s session as markets added to expectations of ECB easing until 2025. EUR swap rates fell 4bp in the 2Y-5Y segment, while the long end was down a couple of basis points in sync with the move in the Bund yield. The next big market mover ahead is the euro area PMI figures out on Thursday. As the balance of risk assessment has clearly changed towards the risk of undershooting, renewed signs of growth weakening could trigger even stronger expectations of near-term policy easing. German ASW-spreads continued tightening across the curve on Friday, and the Schatz-ESTR spread has now broken through 0. Peripheral spreads tightened with the BTP-Bund spread closing 4bp narrower.
FX: As expected, overnight China cut its benchmark lending rates, which supports Asian assets. USD/JPY is trading closer to 149, and EUR/USD above 1.0850 as the USD rally takes a breather. Strong UK data pushed EUR/GBP briefly below 0.83 for the first time since 2022. Scandies remain on the back foot, although Norges Bank has opened the door for FX interventions – a tactical boon for NOK.
