In focus today
In the euro area, focus turns to the October flash PMIs. We expect the manufacturing sector to remain in contractionary territory, while still edging up to 45.4 from 45.0, due to the way in which the PMI index is constructed. We expect the service PMI to remain in growth territory but decline to 51.1 from 51.4 in September. The service PMI is likely supported by a rise in French service PMI following the unwind of the effect of the Olympic Games in August and September. Outside France however, we expect a slight slowdown in service PMIs reinforced by seasonality.
In the US, we also receive flash PMIs, which will likely signal continuing contraction in manufacturing activity and modest growth in services.
In the UK, flash PMIs for October are due for release as well and expected to remain close to unchanged north of the 50-mark.
In Japan, we receive Tokyo CPI Ex-Fresh Food which is expected to decline by 0.3% from 2.0% to 1.7%.
Economic and market news
What happened overnight
In Japan, Japanese Finance Minister Katsunobu Kato warned against currency speculation, as moves in the currency market drive down the yen’s value with USD/JPY reaching 153. This comes hours after the BoJ Govenor Kazuo Ueda indicated a careful approach to raising interest rates, emphasizing the need to avoid moving too slowly. He warned that moving too slowly could create a build-up of speculative positions, potentially triggering a slide in the yen, pushing up import costs.
What happened yesterday
In Canada, the Bank of Canada cut its policy rate by 50bp to 3.75% in a move highlighting the new phase of Canadian monetary policy; namely one in which policy rates are brought back quickly to neutral levels amid inflation recently falling within the target interval. In the monetary policy report Bank of Canada stated that its neutral rate assumption remains 2.75% and that the current evaluation on the balance of risk has become balanced. To us this suggests that the base case from here should be another 100bp worth of rate cuts for the upcoming Canadian monetary policy announcements – likely in 50bp increments.
In the US, 10-year Treasury yields climbed to three-month highs as worries of a less dovish Federal Reserve spread. Equity markets dropped as higher yields pressured rate-sensitive mega caps, such as Nvidia (NVDA.O) and Apple (AAPL.O) declining by 3.57% and 3.05% respectively. Furthermore, McDonald’s (MCD.N) plummeted by 4.88% after an E.coli infection linked to the fast-food chain killed one and sickened many.
In the EU, euro zone consumer confidence increased by 0.4 points to -12.5 from -12,9 in September. Consumer sentiment also rose in the European Union as a whole, reaching its long-term average after gaining 0.5 points to -11.2. In Denmark consumer confidence declined by 2.1 points to -8.9 from -6.8, reaching the lowest level this year as fears of recession overshadows worries about inflation. We anticipate a gradual rise in consumer confidence as purchasing power is restored and interest rates decline.
ECB President Christine Lagarde cooled market speculation advocating for a cautious and data-driven process. This comes in the wake of a recent push from several ECB policy makers voicing their concerns about undershooting the 2% inflation target and being open to speeding up rate cuts.
Equities: Global equities were lower for the third consecutive day yesterday. Much of what we observed could be reiterated from our previous commentary, as this is not a macro-driven sell-off characterised by a spike in volatility. However, a significant shift occurred yesterday with cyclicals being sold off, most notably with US tech underperforming. While specific company-related news may explain some of these movements, we interpret these events within a broader context. Over the past three months, for instance, US tech and tech sectors in general have been underperforming. With a bit of selective analysis, one can observe a considerable underperformance. This trend is not due to an unfavourable macro environment for tech; rather, it stems from the cessation of extreme earnings outperformance and highly elevated valuations. In the US, the performance yesterday was as follows: Dow -1.0%, S&P 500 -0.9%, Nasdaq -1.6%, and Russell 2000 -0.8%.
This morning, most Asian markets were cloaked in red, while European futures showed a mixed picture. US futures were influenced by late-hour earnings released yesterday, which drives growth-related futures higher.
FI: The front end of the euro curve led the bullish steepening of the curve as expectations for a jumbo cut from the ECB rose on the back of General Committee comments. The comments did not exclude the possibility of ECB cutting rates by more than 25bp at one point.
FX: USD rose further yesterday, where JPY was the big loser among G10 currencies. EUR/USD slipped below 1.08 and USD/JPY rose to 153. It was also a tough day for Scandies with EUR/NOK climbing above 11.80 and EUR/SEK above 11.40.
