US GDP data are likely to show a significant slowdown in growth in Q3

Market Movers

• US GDP data are likely to show a significant slowdown in growth in Q3. We estimate that the drag from net exports and slower inventory accumulation will push GDP growth to 1.5% q/q AR despite still solid growth in private consumption of 3.2% q/q AR. We expect Q3 to mark the low point of GDP growth this year and look for a return to above 2% growth next year.

• In the euro area it is time for consumer and economic confidence data for the euro zone. In Germany we will have the early October CPI data from the German federal states in the morning and the pan-German number in the afternoon. HICP inflation, which is released ahead of the euro area figure on Friday, should move back into positive territory and we forecast a rate of 0.1% y/y up from -0.2% y/y in September.

• In Sweden retail sales is on the agenda. See Scandi Markets.

Selected Market News

Last night the Fed sent a clear message in its October FOMC statement: a hike at the December FOMC meeting is a real option and whether we will see the first rate hike in December or next year depends upon the data.

In its forward guidance the Fed is now flagging a clear tightening bias as its wording was changed to ‘In determining whether it will be appropriate to RAISE the target range at its NEXT meeting...’ from ‘In determining HOW LONG to MAINTAIN this target range...’.

The conditions remain unchanged ‘when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.’

Further, the reference that ‘Recent global economic and financial developments may restrain economic activity’ was removed from the statement, which now only says that the FOMC is ‘monitoring’ global financial and economic developments.

We continue to place the highest odds on a January rate hike from the Fed as we believe that the weakness in the manufacturing sector will keep the Fed in a wait-and-see mode at the December meeting. The market now attaches a higher probability, currently 45% compared to the pre meeting 30%, for a rate hike in December and a full 25bp hike is priced by April. 10Y US yields rose 4bp on the release and 2Y a few bp more. The more hawkish Fed did not scare the US stock market that actually rallied on the higher oil price, the result from Apple and on an improved earnings outlook for banks if rates go up.

The low oil price has been an important factor in pushing global yields lower this year but yesterday the crude oil price rose USD2 a barrel to around USD49 a barrel as oil stocks rose less than expected in the US and as refinery demand surprised on the upside.

According to Bloomberg the Chinese Communist party will lower its growth target from 7.0% to 6.5% in the new five-year plan as a four-day communist gathering comes to an end today. A lower target should be expected by the market and is probably still on the optimistic side.

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