Market Movers Today
We start the week with German and Spanish inflation data for October, ahead of tomorrow’s Eurozone figures.
In Germany, we will also get the first estimate of Q3 GDP growth, where we are likely to see a larger decline than the -0.1% we expect for the euro area tomorrow.
In Sweden, the GDP indicator for September will be released, which will provide a first estimate of the Q3 result. We are looking for growth of 0.3% qoq, but we would like to remind everyone that the indicator tends to be very volatile. Later in the day, Governor Thedeén will speak on the “Economic situation and current monetary policy” in New York at 18:00 CET.
Early Tuesday, the Bank of Japan concludes a two-day policy meeting. We expect another tweak of the yield curve control this year, and this meeting looks like the most likely. If the BoJ decides to move tomorrow, there are many options. Raising the rate ceiling to say 1.50% could be one way. If so, they will be sure to emphasize that the intention is better market functioning and not a tightening move, even if both are true.
Overnight we also get the official Chinese PMIs.
For the rest of the week, we have a lot of important data releases with Euro inflation figures tomorrow, a slew of important US data including the October jobs report and the FOMC meeting. We expect the Fed to remain on hold and job growth to cool to +180k, but still show solid labor market conditions.
The 60-second review
War between Israel and Hamas. After the Israeli army’s incursion into Gaza last week, Israel has expanded its ground offensive in the Gaza region by sending troops and tanks into the northern territory of Gaza. Israeli Prime Minister Benjamin Netanyahu has called this a “second stage of war” and has urged Palestinians living in the north to evacuate to the south.
According to officials, the second phase is expected to last for “months”. As the number of civilian casualties rises, so does international concern, prompting US President Biden to emphasize the need to “immediately and significantly increase the flow of humanitarian aid”.
Central bank week. On Wednesday, we expect the Fed to remain on hold in line with consensus and market expectations, with no further hikes expected later. On Thursday, we expect Norges Bank to leave its key rate unchanged at 4.25% and to emphasize a data-dependent approach with regard to a possible hike in December. Later in the day, we expect the Bank of England to leave the key rate unchanged at 5.25% on November 2, which is in line with current market pricing. Overall, we expect the MPC to maintain its previous guidance, emphasizing the “higher for longer” approach.
Equities: Yields continued to set the tone for equities last week. Yields are also the reason for harsh reactions to earnings reports, not least in the FANMAG names. Equities were lower for the week and the yield-sensitive US underperformed (S&P 500 -2% lower, Stoxx 600 -0.8% lower and Nordics mixed). However, it was not a complete risk-off period: Cyclicals generally outperformed defensives during the week, while growth and quality stocks were beaten.
The small cap sell-off even stalled. Communications, Energy and Health Care were among the weaker sectors, while Materials, Real Estate and Utilities rallied. The same dynamic continued on Friday with equities down -0.5%. However, sector performance reversed as Big Tech was helped by Amazon earnings. The VIX rose to 22. Asian markets are mostly lower this morning, but US futures point to a higher open.
FI: European bond yields continued their rally on Friday, with the 10Y Bund falling about 2bp, the curves steepening and the 10Y Italian-German yield spread narrowing slightly. In the US, the curve also steepened from the short end and this has continued in Asian trading this morning with US Treasury yields up 2-4bp. This week we will get both inflation data from Europe and labor market data from the US. Spanish and German inflation data will be released today.
FX: EUR/USD is in wait-and-see mode in anticipation of the Fed, while USD/JPY is back below 150. Both EUR/SEK and EUR/NOK seem to be consolidating just above 11.80 waiting for the next trigger either up or down. Consolidation seems to be the theme for EUR/GBP as the Pound awaits Thursday’s BoE meeting.
Credit: Credit markets ended the week on a cautiously positive note as longer term rates dipped slightly. The Itraxx Main tightened 0.1bp to 89.3bp while the Xover tightened 0.9bp to 469.8bp. The overall cautious markets with still weak liquidity comes on the back of a mixed Q3 earnings season so far. With almost half of the companies in the EuroStoxx 600 index having reported, some 53.6% have beaten the earnings consensus, which is around 3ppt lower than last year.
