All eyes on Euro area inflation today

In focus today

In the euro area, HICP inflation data for October is released. With inflation data out from Spain, Germany, and Belgium, we track euro area HICP at 2.0% y/y today, above consensus expectations (cons: 1.9%) driven by broadly higher inflation also in core inflation, which we see unchanged at 2.7% y/y (cons: 2.6%). Most importantly, we will see the monthly increase in seasonally adjusted services prices (prior: 0.14% m/m s.a.). For ECB this will help determine if weak momentum continued into October.  We also receive the September unemployment rate, which will be interesting following easing labour market dynamics, while unemployment rate has remained record-low at 6.4% 

In the US, the Employment Cost Index for Q3 is due for release this afternoon. This is a key measure of labour cost pressures for the Fed. September monthly PCE data will also be released.

The US Presidential election is coming closer, and we will host a conference call on 6 November to give our quick take on the potential market implications of the election: Conference call on the implications of the US election for Global and Scandi markets.

Economic and market news

What happened overnight

In Japan, the BoJ kept rates unchanged as expected this morning but stressed its intention to keep hiking borrowing costs if the economy sustains a moderate recovery. The BoJ will prefer a wait-and-see approach ahead of the US presidential election next week and until the political situation after the ruling coalition lost its majority is more certain. We expect another hike in December, particularly because the BoJ might see it as necessary to support the yen. With inflation on target and consumers' purchasing power heading slowly in the right direction, there is also an economically sound case for it, irrespective of the yen.

In China, October PMIs showed upbeat signs, with the composite PMI increasing to 50.8 driven by both manufacturing and non-manufacturing activities, which printed 50.1 (prior: 49.8) and 50.2 (prior: 50.0), respectively. This indicates that latest stimulus measures are helping pick up the economy.

What happened yesterday

In euro area, Q3 GDP rose 0.4% q/q beating expectations of a 0.2% q/q increase. The ECB estimated growth at 0.2% q/q in their latest projections, so the data comes as a pleasant surprise. Growth was driven by Spain which recorded a record 0.8% q/q expansion (cons: 0.6%, prior: 0.8%), France that got a boost from the Olympics with 0.4% q/q, and Germany that recorded rising activity of 0.2% q/q due to a downward revision of growth in Q2. However, growth outlook remains fragile as the manufacturing sector continues to struggle with declining activity and the service sector is moderating. The outlook for 2025 is dependent on consumption picking up as real income rises and an improvement in the industry. Currently, we are not seeing this, leaving downside risks to the outlook. 

The higher-than-expected data on inflation and growth supports the case and our call for a 25bp cut by the ECB in December against a "jumbo" cut."

In the US, Q3 GDP figure is mostly in line with expectations at 2.8% q/q SAAR (cons: 2.9%). The increase particularly reflected solid growth in private spending, showing that consumers remain resilient ahead of the US presidential election. ADP employment for October exceeded expectations with +233k (cons: +111k). September is revised slightly higher from +143k to +159k. ADP has usually been a mixed predictor for NFP, so a modest reaction might be reasonable.

In Sweden, we changed our call for the Riksbank meeting next week and we now expect a 50bp cut down to 2.75% (previously 25bp cut). This change follows the release of disappointing growth data earlier this week. The GDP indicator for Q3 reported a decrease of -0.1% q/q. Additionally, both the Riksbank's company survey and the NIER survey have shown diminished expectations in the business sector. For a full preview ahead of next week's Riksbank decision.

In the UK, the Labour government released their first budget. In line with our expectation, the budget provided some expansionary measures with funding sourced from large tax increases worth GBP 40bn and the change in debt measure estimated to provide around GBP 50bn. However, and importantly, borrowing is set to rise substantially averaging GBP 36bn each year over the next five years. We have long argued that a more expansionary budget could trim markets expectation for a December cut, which today's events have provided support for. We continue to expect a 25bp cut in November and an unchanged decision in December.

Equities: Global equities were lower yesterday, driven by disappointing earnings and likely some de-risking ahead of the US election. In our opinion, macro data should not be blamed for the weak development yesterday, as most macro figures were strong, even in Europe where equities underperformed the most. Please also consider bond yields, which were marginally higher, as well as sector and style rotations; cyclicals performed well, quality underperformed, and minimum volatility was flat. This does not suggest a classic negative environment based on growth fears. Apologies for repeating ourselves here; this is expected given the massive number of factors currently at play, plus US election being less than one week away. In the US yesterday, Dow -0.2%, S&P 500 -0.3%, Nasdaq -0.6%, and Russell 2000 -0.2%. Asian markets are lower this morning, with Chinese stocks standing out on the positive side. European and US futures are also lower, led by the tech and growth segments of the indices.

FI: In a choppy session, driven by a heavy string of data releases, we saw yields selling off from the front end in a bearish flattening of the curves. The upside surprise to German inflation data took out 4bp of the jumbo rate cut discussion for December and thus now 'only' points to 31bp of ECB rate cuts in December. This combined with higher European growth (and above ECB projected Q3 development), means that a slower and more gradual approach was assessed as the most likely scenario by markets.

FX: EUR/USD trended toward the upper end of the 1.08-1.09 range on the back of euro area data that was better than feared. USD/JPY declined slightly, still hovering around 153 after the Bank of Japan's anticipated decision to hold the policy rate at 0.25% this morning. EUR/GBP experienced a rollercoaster day in an eventful session for UK markets with the release of the Labour government's first budget. NOK/SEK continues to move higher, driven largely by relative rate spreads as NOK-SEK spreads reach new wides. EUR/NOK drifted up to 11.90, while EUR/SEK neared 11.60.