German ZEW expectations index could extend the decline in October

Market Movers

• We expect the German ZEW expectations index to extend the decline in October but at a slower pace than in September, as indicated by the Sentix investor confidence released last week. The weakness in emerging markets and the Volkswagen scandal are both weighing on the index.

• We estimate UK CPI inflation of 0.0% m/m in September. While declining gasoline and diesel prices were a drag on inflation in September, we estimate that this was offset by higher inflation in the price of services. This is also the reason why we expect core inflation to have moved slightly higher in September.

• US small business optimism for September is released this afternoon. The index has come off its high but remains above its 2011-2014 average.

• Swedish inflation data are key for the Riksbank – past SEK weakness might push core inflation higher in September.

Selected Market News

Chinese trade data released this morning showed imports plunging 17.7% y/y in September, a larger drop than the expected 16.5%. Exports on the other hand fared much better than expected with a decline of only 1.1% y/y versus expectations of a 7.4% drop, suggesting some stabilization in global demand. However, the mix of weak imports and better exports does not suggest much progress in the Chinese authorities’ objective to shift growth from exports to private consumption. Chinese equities are taking a breather after the rally over the past week and are slightly lower this morning.

Fed board member Lael Brainard in a speech overnight sounded more cautious than her colleagues at the FOMC, William Dudley and Stanley Fischer. Brainard, who rarely speaks on the economic outlook, said that ‘risk management considerations counsel a stance of waiting to see if the risks to the outlook diminish’ and that ‘the risks from abroad appear tilted to the downside’. The market has clearly already bought that message, as the first Fed Funds rate hike is not fully priced until mid next year and US yields remain range bound as long as macro data give no clear answer to what the future path for Fed rate hikes will be. In other Fed speeches yesterday, Dennis Lockhart repeated that he sees lift-off later this year as appropriate, while Charles Evans, a known dove, believes the Fed should not hike rates until mid next year.

With US bond markets closed yesterday trading was rather thin. EUR/USD was broadly stable at the high end of its recent range and US stocks ended the day slightly higher. The WTI oil price slipped again yesterday after a short increase above USD50 per barrel and metals prices have come down this morning on the weaker-than-expected import data out of China.

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