Thursday's ECB meeting main event this week

In focus this week

Today is set to be a quiet start of the week, without major market movers on the data front.

We continue to await Israel's response to the Iranian missile attack on 1 October, which will determine whether we will see a further escalation of the conflict in the region. According to the American news channel NBC, unidentified US officials believe that Israel will be targeting Iranian military and energy infrastructure. Tensions continue as Hezbollah stroke Israel with a drone bombing south of Haifa where four IDF soldiers were killed and about 67 people injured. Israel made attacks in Gaza near a school which is housing internally displaced persons. Minimum 15 people were confirmed dead.

On the data front we receive final inflation data from Sweden on Tuesday and the ZEW index from Germany. On Wednesday UK CPI is due for release. On Thursday, focus will be on the ECB meeting where we expect the ECB to deliver yet another rate cut of 25bp, bringing the deposit rate to 3.25%. Also on Thursday, we will receive the final September inflation data from the euro area, and the Central Bank of Turkey will announce their rate decision. To round off the week, we get Japanese inflation data and GDP data out of China on Friday.

Economic and market news

What happened overnight

China began large-scale military exercises around Taiwan. This comes after Taiwanese President Lai Ching-te's National Day speech last week, where he asserted his country's sovereignty. China calls the exercises a "stern warning". Officials from the US government condemned the drills and said that there was no justification for them.

What happened over the weekend

Fitch downgraded the outlook of France from 'stable' to 'negative' on the back of the fiscal risks and the more negative view on the fiscal situation in France made by the new French government, where the budget deficit for 2024 is expected to be 6.1% and the budget deficit for 2025 is expected to be 5% resulting in rising debt to GDP, which Fitch expects to be more than 118% of GDP by 2028. However, they have not downgraded France from AA- yet, but has affirmed the rating although their model rating suggests an A+ rating. The 10Y spread between France and Germany is testing the 80bp level and the risk is that it would go towards 90bp even though this is a very wide level seen in a historical context.

In China, September CPI inflation came in lower than expected at 0.0%|0.4% m/m|y/y (consensus: 0.4%|0.6%, prior: 0.4%|0.6%). Core inflation came in at 0.1%, down from 0.3% in August. The print suggests that deflationary pressures increased further in September, which comes from weak domestic demand. The Chinese finance minister Lan Fo'An spoke about fiscal stimulus at an awaited press conference Saturday, saying that the government is looking at additional ways to boost the economy, but failed to speak about size or timing of the measures, which investors and analysts were hoping for. The market reaction in Chinese equities were mixed as CSI 300 increased by 0.3%, however the Hang Seng index declined 1.7% in early trading Monday. Brent Crude oil fell 1.8% in Early trading Monday, which could be a reaction to deflation fears in China.

What happened on Friday

In the US, September PPI came out slightly below expectations, but core PPI (which excludes the decline that we saw in energy prices during September) was close to consensus expectations. There was some moderation across both goods and services producer price inflation. Overall, this week's CPI and PPI data was, at the very least, not alarming for the Fed and the disinflationary process remains well underway.

The University of Michigan consumer sentiment survey fell to 68.9 in October from 70.1 in September, in contrast to expectations of a rise to 70.8. The one-year inflation expectations ticked slightly higher to 2.9% from 2.7%, which could likely be driven by the latest up-tick in oil/gasoline prices.

In Germany, we got the final inflation data from September, which showed still elevated underlying inflation. The 'LIMI' measure of domestic inflation fell to 4.82% y/y from 4.95% in August, which is another move in the right direction, but the level remains high.

FI: 10Y US Treasury yields continued to rise last week and are once again trading above 4% as the market has been repricing monetary policy expectations in the US. This has had a spillover effect on Europe, where there has also been a solid repricing and a rise in yields, where the 10Y German government bond yield has risen almost 25bp since early October. Furthermore, the Bund ASW-spread ended below 25bp on Friday. The 10Y spread between France and Germany is testing the 80bp level and given the negative rating action last week there is risk for a further widening.

FX: Last week in FX markets was characterised by USD strength and underperformance in the cluster of commodity and cyclically sensitive currencies with CAD and NZD leading the losses. In the Scandies, both SEK and NOK staged a late-week comeback although EUR/NOK and EUR/SEK still entered the weekend around 11.70 and 11.35, respectively. Finally, the JPY has come under renewed pressure amid the rise in global yields and USD/JPY is now back close to the 150-mark.