Oil prices tumble on OPEC+ supply – HICP prints to give clues on Euro area figure

In focus today

In the euro area, focus today is on the September inflation data from Spain, France, and Belgium, which will give clues on the euro area data on Tuesday next week. We expect euro area HICP inflation to decline significantly to 1.8% y/y in September from 2.2% driven by both base effects on energy inflation and declining monthly energy prices. Excluding energy inflation and food, we expect core inflation remained at 2.8% y/y (0.20% m/m s.a.) due to sticky services inflation. The dip in headline inflation below 2% is expected to be temporary due to base effects and we expect inflation to rise above 2% again in November and December.

In Germany, we focus also on data on unemployment as the German labour market has weakened lately in contrast to other euro-area countries.

From the US, headline and core PCE inflation are released today, where markets see prints at +2.3% y/y and +2.7% y/y, respectively.

Although economic activity in Norway has been relatively weak over the past year, there has been only a moderate rise in unemployment. We expect that the unemployment rate increased marginally to 2.1% (seasonally adjusted) in September. Higher real wage growth and a period without rate hikes have improved the purchasing power of households, and private consumption picked up in the summer months. However, we expect that the retail trade was unchanged in August.

We are yet to see results from the Japanese ruling LDP leadership election, which will be interesting for markets due to the recent hawkish turn of the BoJ looking highly politically influenced. Abenomics loyalists preferring a slow normalisation of monetary policies as well as hawks are on the ticket in an election that will be heavily influenced by behind-the-scenes arm wrestling among party heavyweights.

Economic and market news

Oil prices tumbled about 2.5% on the news that Saudi Arabia has allegedly abandoned its (unofficial) price target of 100 USD/bbl. and instead opt to boost production to regain market shares. Note that we have no official communication yet, but the existing OPEC+ production cuts are slated to expire on 1 December, and this will be a shift from the trend since 2022 where focus has been on cutting, rather than increasing, oil production.

The SNB cut its policy rate by 25bp to 1.00% as we expected. Markets were close to evenly split between 25bp and 50bp, which resulted in a slight move lower in EUR/CHF upon announcement, though dovish communication caused the cross to erase losses. See more below.

In China, we got more stimulus signals with both verbal communication from the Politburo on the need for policy action to turn the economy as well as specific details on handouts and spending-vouchers, capital injection into state banks, and support for the property market. The combined package from the latest days highlights the strongest focus on ending the crisis we have seen since 2021 in our view. Chinese stocks, metal prices and the CNY continued to rally during the day.

Tokyo CPI saw core inflation at +0.19% m/m adjusted for seasonality, which is well in line with the BoJ's target of 2% annual inflation. The so-called 'core core' figure, which excludes food and energy, printed at just at 0.06% m/m seasonally adjusted however, indicating somewhat softer price pressure providing downside risk for inflation, and the market reaction was initially for a slightly weaker yen. Broadly, however, the BoJ will be satisfied with the latest print, and it will likely not change the decision in October, where we expect a hold.

Equities: What a day in global equities yesterday, marked by significant global increases and an intriguing sector rotation. On one hand, China is stimulating its economy; on the other, Saudi Arabia is potentially abandoning its oil price target to regain market share. In Europe yesterday, the energy sector was down more than 3%, while the consumer discretionary sector rose by more than 5%, driven by car producers and, notably, heavyweight luxury brands. This serves as a poignant reminder for all of us to check whether our judgments are correct and for the right reasons. It's easy to deceive oneself these days. In the US yesterday, the indices were as follows: Dow +0.6%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 +0.6%. Most Asian markets are continuing to rise this morning, once again led by significant gains in Chinese stock markets - it looks like we are on track for best week for Chinese stocks since 2008(!).

FI: There was modest movement in European government bond yields yesterday apart from the continued pressure on France, but neither the Bund ASW-spread nor the BTPS-Bund spread has widened as we saw back in June. Hence, we are not seeing the same kind of risk-off movement as we saw back in June when President Macron called a snap election. Revision of US economic data as well as lower-than-expected jobless claims sent US bond yields higher with 2Y Treasuries rising almost 10bp yesterday.

FX: EUR/USD has spent most of the last two weeks within the 1.11-1.12 interval, though with a couple of unsuccessful attempts to break out of the range. USD/JPY tried to establish above 145 but was rejected twice yesterday. The British pound continues to shine on the back of relatively solid data and tight monetary policy stance - yesterday GBP/USD made a new 2.5year high at 1.3430. The Swiss franc strengthened after the SNB cut 25bp and EUR/CHF is back trading in the mid-0.94s. EUR/NOK held on to previous gains just below 11.80, while EUR/SEK was rangebound around 11.30. USD/CNY has fallen below 7.02 in recent days on the stronger stimulus signals and likely new capital inflows to the stock market. Our medium-term view is still that the cross will resume higher as we remain bullish on the USD. But there is rising downside risk to our 7.25 12M forecast. EUR/CNY has fallen to around 7.84, the middle of the 7.70-7.95 range it has traded in for a long time now. We could see more downside in the medium term as it is expected to also get support from a lower EUR/USD. The idiosyncratic strengthening of the CNY has led to a bit of decoupling in the normal high correlation between EUR/USD and EUR/CNY, but we expect it to resume when the dust settles from the recent days action.