Weekly focus: ECB delivers a lot of words and little guidance

ECB's widely anticipated 25bp rate cut did not end up rocking the markets, as Lagarde delivered little concrete guidance on what the central banks' next steps will be. Markets saw her remarks slightly on the dovish side, as she noted inflation risks 'may' be slightly tilted to the downside. Over the past weeks, continuing weakness in PMIs, downside surprise in September HICP and declines in markets' inflation expectations have all supported the case for faster easing and current market pricing implies even a modest 20% probability of a larger 50bp cut in December. Pace of cuts in 2025 remains uncertain as well, but we stick to our call for quarterly 25bp reductions, which would set the deposit rate at 2.00% by the end of next year. Read more from our full ECB Review, 17 October.

Prediction markets have continued to signal rising probability of Donald Trump clinching victory in the upcoming US elections. At the time of writing, Polymarket sees odds of Trump's win at nearly 61%. Republican 'clean sweep' is seen as the most likely total outcome with 43% probability, followed by a Harris win with a divided Congress at 24%. That said, the latest swing state polls signal the race remains closer than prediction market odds suggest, according to RealClearPolitics. Trump is in the lead in all the seven most important swing states, but in 5/7 states, he leads by less than 1 percentage point, which falls well within typical margins of error (usually 2-4%).

Either way, we think a Republican sweep could provide near-term support for US equities and the broad USD, and especially the latter remained on a strong footing this week. US September retail sales came out on the strong side of expectations, with control group sales (which strip away the most volatile categories) growing +0.7% m/m SA. Unusually positive seasonal adjustment might have distorted the monthly growth figure higher - in non-seasonally adjusted y/y terms growth cooled down to 2.7% (from 3.9%). But even so, it seems US consumer spending remains on a healthy footing. 

Chinese Q3 GDP growth was slightly stronger than expected at 4.6% y/y (from 4.7%), but make no mistake, latest data continues to underpin the story of weakening momentum in consumer spending. CPI data from last weekend showed price pressures still hovering near deflation, latest export and credit growth figures were weaker than expected and housing market shows no real signs of recovery with very weak sales volumes and declining prices. All-in-all, we think the latest round of data underscores the need for much stronger stimulus going forward, Finance Ministry's press conference last Saturday still lacked clear details on what to expect on the fiscal stimulus front.

Next week will be calm before the storm of US elections, nonfarm payrolls and FOMC meeting all within the first week of November. Main data focus will be on October flash PMIs on Thursday, which will likely signal continuing contraction in manufacturing activity and modest growth in services on both sides of the Atlantic. Chinese Loan Prime Rates will likely be cut by 20bp on Monday following a 30bp cut to the 1-year Medium Term Lending facility rate earlier. FOMC participants will also have their final chances to provide guidance next week ahead of blackout starting on Saturday 26 October.

Download The Full Weekly Focus