The US GDP update came in slightly softer than expected

European and US markets nosedived yesterday on the back of ‘good news is bad news’ and the futures hint at a bearish start to Thursday’s session.

First, Spain, France and Germany revealed better-than-expected growth numbers in Q3. Germany even eked out an unexpectedly positive figure, which certainly helped – I wouldn’t say ‘to improve’ the mood but – to prevent sentiment from getting worse in the midst of a jungle of bad economic news, there. VW posted its least profitable quarter since the pandemic but said that they could avoid factory closures IF the workers accepted a 10% decrease to their salaries and the German unemployment change came in almost double the expectations, but seeing the German economy eke out that 0.2% advance in Q3 was a good surprise.

Now, the encouraging GDP figures came in with a cost: inflation in Spain and Germany came in higher than expected. Inflation in Germany crossed past the European Central Bank’s (ECB) 2% target and reached 2.4% in October.

The aggregate CPI update for Eurozone, due this morning, is expected to brush up against the 2% target. The combination of better-than-expected growth and higher-than-expected inflation weighs on accelerated rate cut expectations from the ECB. And the latter is positive for the euro. This is why the EURUSD tested the 1.0870 resistance, which matches the minor 23.6% Fibonacci retracement on the September to October selloff and the 200-DMA, but couldn’t clear it.

And the reason why it couldn’t clear it is because mixed data came in from the US. There, the GDP update came in slightly softer than expected, at 2.8% versus 3% printed previously, but consumer spending jumped from 2.8% to 3.7% defying the rising credit card debt and delinquencies, and more importantly, PCE prices fell to 1.5%, and core PCE prices fell less than expected but printed 2.20% - which now is very close to the Federal Reserve’s (Fed) 2% policy target. The September core PCE index is due today and is expected to show a further slowdown as well.

Soft landing: Achieved?

With the current data that we have in hand, some investors now argue that the Fed already achieved the soft landing that it was dreaming of. As such, the US dollar was weaker yesterday because the softening price pressures could allow the Fed to continue its rate cuts, but the downside remained limited because the data suggests that the cuts could be moderated. The ADP report showed yesterday that the US economy added 233K new private jobs last month, more than the double of 110K expected by analysts and was stronger than the number printed a month earlier. Of course, Friday’s official data will say the last word but Friday’s figures could also bring some positive surprises if the Boeing strike and hurricanes had a lighter than expected impact on the numbers. We will see.

For now, the US dollar remains bid despite yesterday’s weakness, the 2-year yield spiked higher – as the Fed doves scaled back their Fed cut bets. A 25bp cut at next week’s FOMC meeting remains on cards. The probability assessed to that is around 96%. But the Fed is not seen repeating the 50bp cut anytime soon.

Budget was ...ok

In the UK, the budget day couldn’t give the pound the energy it needed to clear the 1.30 offers. The announcement went as smoothly as it possibly could – given the amplitude of the bad news. Reeves said that the country will raise taxes by £40bn pounds to boost spending on public services. The UK also announced earlier that they would boost gilt sales by almost £20bn this fiscal year. But the spending would be less than expected by the market. That brilliant management of expectations helped traders keep their nerves together. The UK’s 10-year yield spiked to 4.40% but the selloff in sterling remained contained as the Bank of England’s (BoE) hopes of seeing further inflation easing in the UK went up in smoke as increased spending pressures are now knocking on the door.

China and Japan

China posted a small but unexpected expansion in its manufacturing sector in October, a piece of news that may have help crude oil extend yesterday’s recovery, and the Bank of Japan (BoJ) maintained its policy unchanged at today’s meeting, as expected, and Governor Ueda pointed out concerns regarding the increasingly uncertain global economic outlook. But the board ‘remains committed to further rate increases if economic and price data align with its forecasts’ and that line capped the upside in the USDJPY limited, and gave some strength to the yen.

Earnings update

Microsoft and Meta released their Q3 earnings yesterday, after the bell, and the results were good. Microsoft posted a better-than-expected quarterly revenue growth, fueled by its cloud computing business and Office – which integrates AI capabilities. But the company projected slower quarterly growth in cloud revenue, highlighting its challenge in bringing data centers online quickly enough to meet the rising demand for AI services. Shares dropped 3.7% in the afterhours trading.

Similar with Meta. The company posted strong quarterly results, improved ad revenue thanks to AI, but the weaker than expected user number in Q3, and the plans to spend more on AI didn’t please investors. The shares fell 3% in the afterhours trading.

Today, it’s Apple and Amazon’s turn to go to the earnings confessional. And they should not only meet and beat expectations but came in with a solid forecast to keep enthusiasm going.