In focus today
Today, we should finally get actual numbers on China’s fiscal stimulus as the meeting in the Standing Committee of the National People’s Congress ends. In the US, the University of Michigan’s flash consumer sentiment survey is due for release.
Economic and market news
What happened yesterday
In the US, the Fed unanimously cut rates by 25bp to 4.75%. This was widely expected and with the FOMC meeting giving little guidance for 2025, the market reaction was very muted. The Fed is still in a cutting cycle, economic data has generally been somewhat stronger than expected and downside risks have eased. However, how that translates to the rates outlook remains uncertain. Markets price in around 65-70% probability of the Fed delivering another 25bp cut at the December meeting. We make no changes to our call and still expect cuts to continue at every meeting towards H1 2025.
In the euro area, the euro climbed 0.64% regaining lost ground on the 1.8% fall on Wednesday, as investors digest the political events in Germany. Depending on the upcoming developments in Germany, a stable German government and a more pro-active fiscal stance could foster renewed confidence in the euro. The retail sales data surprised to the upside with retail sales m/m at 0.5% (cons: 0.4%, prior: 0.2%) and retail sales y/y at 2.9% (cons: 1.3%, prior: 0.8%). Read about our outlook for the euro area in: Research euro area – Fiscal policy to slow growth in 2025 – but mind the RFF, 7 November.
In Germany, following the turbulent political events of Wednesday, industrial production declined 2.5% m/m (cons: -1.0 % m/m, prior: 2.9% m/m) in September, thereby extending the downward trend seen over the past one and a half year, leaving German industrial production in Q3 2.3% lower than in the second quarter. We expect activity in the industry to continue to fall in the coming quarter, before gaining some support next year as financial conditions ease, global manufacturing improves, and energy prices have come down. However, we are not looking for a strong rebound next year but merely a stabilisation.
In the UK, the BoE cut rates by 25bp to 4.75% as expected. Importantly the committee shifted to a more hawkish stance in terms of a gradual approach. Last meeting the gradual approach would be warranted for “most members” now it is included in the bullet regarding the entire MPC. Overall, we saw a very muted reaction in the market, which we think the MPC aimed for following the jitters from the budget. Sending a signal of a gradual cutting cycle with a marginal hawkish bias given the inflationary budget, but not spooking markets following the significant market reactions we saw last week. We expect the BoE to remain on hold at the December meeting and maintain its “gradual approach”. In 2025, we expect cuts at every meeting starting in February and until H2 2025, where we expect a step down to a quarterly pace. This leaves the Bank rate at 3.25% by YE 2025.
In Sweden, the Riksbank cut rate by 50bp to 2.75% as expected as focus turns to support growth and the expected recovery for next year. The Riksbank highlighted uncertainty around the economic recovery, international developments on economic policies (i.e. US election), geopolitics and the SEK. We continue to expect 25bp cuts over the next three meetings and finally reaching an end point of 1.75% by June, but also admit that the uncertainty looking into next year is high.
October flash CPIs came out above both market expectations and Riksbank expectations, with CPI at 0.2% m/m and 1.6% y/y, CPIF at 0.4% m/m and 1.5% y/y and CPIF ex energy at 0.2% m/m and 2.1% y/y.
In Norway, Norges Bank stayed on hold at 4.5% in line with our view and market expectations. As has been the case historically for Norges Bank interim meetings, the central bank gave very little news for markets to trade on. Norges Bank instead reiterated the message from September that rates will most likely be kept unchanged in December and that the first cut most likely looks set for March 2025; in line with our call.
In Japan, September wage data was released with annual earnings growth remaining solid and unchanged at 2.8%. While this still implies a 0.1% drop in annual real earnings, deflated with CPI excl. rent, but developments in recent months look promising. Currently we do not see wage data as a strong argument for hiking nor waiting. The Trump win added further to the yen slide giving some tailwind to our call for the next hike in December. Down the line, we will look out for the vote on PM in the Lower House on Monday and whether a new coalition will be opposed to higher rates.
In Denmark, Statistics Denmark reported a 4.9% decrease in total industrial production for September, with a more modest 2.2% decline when pharmaceuticals are excluded. Despite these figures, Denmark’s industrial sector continues to perform well compared to other European regions, bolstered by a 1.3% upward revision in production in previous months. Globally, industrial performance is weak, particularly due to prolonged dip in demand for physical goods, high interest rates and economic slowdowns. However, Danish machinery industries have shown resilience and growth. Looking ahead, Danish industrial sales have promising prospects with potential growth initiatives in China and anticipated international rate cuts. However, forthcoming US trade policies under Donald Trump may introduce risks to Danish exports, although his proposed tax cuts might temporarily boost American consumption and, consequently, Danish exports.
Equities: Global equities were higher again yesterday, on the second trading day after the news about the next US president. One of the most intriguing aspects of yesterday’s trade was that investors did not send down Emerging Markets, indicating how much was already priced in, along with the usual beta to growth. Moreover, one thing is Trump’s comments during the election; another is how they translate into actual politics.
Calmness was the second significant takeaway from yesterday. There were few outsized moves, with the VIX and the move index dropping significantly. The VIX is already down at 15, matching the level we argued for a week ago if the election uncertainty had not been affecting markets. Thirdly, we observed some reversal of moves and rotations yesterday. Some of the biggest winners, including small caps and banks, underperformed. While some of this can be related to the uncertainty about the composition of the House of Representatives, we place greater weight on the belief that Trump and the new administration will not reverse the economic outlook.
To the equation of yesterday’s moves, we must also add the fact that three major Western central banks made cuts. However, all of these were as expected and priced in before yesterday. In the US yesterday: Dow 0.0%, S&P 500 +0.7%, Nasdaq +1.5%, and Russell 2000 -0.4%. This morning, Asian markets are mostly lower, while European futures are marginally higher. US futures are very close to unchanged, feeding into the narrative of calmness returning to financial markets very quickly following this US presidential election.
FI: 10Y US Treasury yields fell some 10-12bp through yesterday’s session as markets revisited the political premium added on Wednesday. Last night’s FOMC meeting did not fuel any noticeable reaction in markets as Powell abstained from providing specific clues on the December meeting. In Europe, the German ASW-spread tightening continued through yesterday’s session as the political turmoil in Germany added renewed pressure on bonds. The Bund spread is now trading at negative levels (-1.8bp) – the lowest levels seen since 2004. In EGB space, peripherals such as Italy saw some outperformance yesterday with the 10Y BTP-Bund spread narrowing 4bp.
FX: EUR/USD rose to around the 1.08 mark as broad USD appreciation following the Trump election outcome paused yesterday, with anticipated 25bp rate cut from the Fed. GBP/USD rose and temporarily breached 1.30 after Bank of England cut the policy by 25bp to 4.75%. We have argued for some time that EUR/SEK had reached overbought territory and was prone for a correction. Hence, we approve of the SEK gains after the US election even though it was a Trump win and after the Riksbank even though it was a 50bp rate cut. EUR/SEK now at 11.55 after peak just above 11.70 earlier this week. EUR/NOK dropped to below 11.80 after Norges Bank left rates unchanged. NOK/SEK rose to a 0.9880 intraday peak, though some gains was erased in the US session.
