Executive briefing: Soft landing continues

The upcoming US election is attracting an unusual amount of market attention. Normally, elections have relatively little impact on financial markets as a change in political power only gradually and unpredictably affects economic policy. However, in the current situation with already very unsustainable public finances in the US, markets are sensitive to the perception that a Republican president with a majority in both chambers of Congress (a "clean sweep") would further loosen fiscal policy - even though it is unclear if that in fact would happen. Also, Donald Trump's policy of sharply higher tariffs could have significant effects in currency markets and be negative for other countries, although it is worth keeping in mind that if US fiscal policy is loosened it will, all else equal, increase the need for US imports, higher tariffs notwithstanding. Opinion polls do not point to a clear winner and there is a risk that a clear election result will take a long time to emerge, so this uncertainty could continue for a while yet. Should the Republicans win, we will also likely have prolonged uncertainty over what their policies will be.

Economic data mostly continue to support the soft-landing story for the global economy. US GDP grew at an annualised rate of 2.8% in Q3, while core inflation is close to the 2% target. Employment only increased by 12,000 in October, the lowest monthly increase since the pandemic. However, that number was likely influenced by weather events and strikes. The overall picture of the labour market is much more consistent with a very gradual cooling. The path is still clear for gradual rate cuts from the Fed.

Euro area economic growth was stronger than expected at 0.4% q/q (1.6% annualised) in Q3, to the high side of most estimates of the long-run potential. However, the number was to some extend boosted by the Olympic games in France and by a downwards revision of Q2 in Germany. The two biggest euro area economies still look weak when looking at the underlying numbers, while strong growth continues in Southern Europe, not least Spain. Unemployment for the whole area set a new low at 6.3% in September, while inflation in October was exactly at the 2% target. With the underlying weakness in growth, we still expect inflation pressure to weaken, and the ECB is clearly concerned that this could lead to a return to the period of too-low inflation. Hence, we have adjusted our outlook and now expect a string of 25bp rate cuts that will bring the ECB deposit rate from the current 3,25% to 1,5% by September next year. However, given the reasonably good recent data, we see the probability of a 50bp rate cut at the next meeting as low.

PMI data suggest that the Chinese economy picked up growth in October, but we are still waiting for the specifics of the planned stimulus to judge the outlook. The election result in Japan was unclear and raises some question marks over economic policy, including monetary policy where we continue to expect rate hikes, but the timing is uncertain. In the UK, the government's budget plans have again raised concerns about the fiscal situation as it implies and estimated almost GBP 150bn extra borrowing over five years. The outlook still points to rate cuts in the UK, but not as quickly as elsewhere in Europe.

Download The Full Executive Briefing