Weak domestic demand and trade pressures weigh on China's economy

In focus today

In the euro area, we get the second estimate of GDP in Q3 and the first data on employment. We expect that euro area employment was stagnant at 0.0% q/q as country data already released showed declining employment in France and Germany and rises in Spain and the Netherlands. Hence, the labour market is moderating but at a strong level. 

When Sunday becomes Monday, Q3 GDP data is released in Japan. Following a nice streak with solid growth for five consecutive quarters, Q3 is likely to end the streak. Q3 exports have looked weaker and retail sales have declined markedly. Residential investments are also set to move lower after construction starts have plunged. We think the 0.6% q/q consensus GDP contraction looks too dire, though. Overall, the economy is on a decent footing. Stronger wage growth is the key to further BoJ hikes.

In Sweden, the Labour Force Survey for October is due. Known for its volatility, the survey should be interpreted cautiously. The October group, last measured in July, has been one of the weaker sample groups this year. Due to this, we expect only a marginal decline in unemployment from 8.7% to 8.6%, despite improved labour market data from the Swedish Public Employment Service earlier this week. However, a larger positive surprise is possible and would further strengthen the ongoing labour market recovery. Even a weak figure today would not alter the overall outlook, as early and reliable indicators consistently signal a stronger labour market ahead. According to the Public Employment Service's more stable measure, unemployment decreased to 6.8% in October.

Economic and market news

What happened overnight

In China, October data showed slowing economic momentum, with industrial output rising 4.9% y/y (cons: 5.5%, prior: 6.5%) and retail sales increasing 2.9% y/y (slightly above expectations but the weakest in over a year). Urban investment fell 1.7% y/y, while house prices continued to decline by 2.2% y/y. The surveyed urban unemployment rate improved to 5.1%, better than the expected 5.2%. Weak domestic demand and trade-war pressures remain key challenges, while policymakers are hesitant to introduce significant stimulus measures, saving it for 2026, as they are already close to achieving the 5% growth target for 2025.

What happened yesterday

In the US, the government shutdown has disrupted the Bureau of Labor Statistics' (BLS) ability to collect data for the October jobs report and CPI. As a result, these figures may either be delayed, published with imputed data, or cancelled entirely. While the BLS may obtain partial data for the establishment survey (used for calculating non-farm payrolls), the household survey, required to estimate the unemployment rate, was missed. This means the first 'real-time' release will likely be the November jobs report, scheduled for 5 December. Although data collection for this report has been delayed, it should still be published in time for the next Fed meeting on 10 December.

In the EU, the European Parliament has voted to scale back sustainability and ESG legislation, reducing the scope of corporate reporting requirements. The decision comes amid pressure from US business groups and a shift in political alliances, with the centre-right EPP forming a majority with far-right members. The changes mean that more than 90% of companies originally in scope of environmental, social and governance reporting requirements will no longer need to comply. Negotiations with the European Commission and Council are due to start next week, aiming for a final decision by year-end.

In Sweden, final October CPI numbers aligned with the flash estimate. CPIF ex energy rose 0.3% m/m and 2.8% y/y, while CPIF increased 0.4% m/m and 3.1% y/y. Food prices drove much of the upside surprise, rising 0.4% m/m compared to the anticipated -0.2% m/m ahead of the flash release.

In the UK, GDP declined 0.1% in September, leaving Q3 growth at just 0.1% q/q and 1.3% y/y. The weaker-than-expected data has pushed EUR/GBP slightly higher and markets now price in a 21bps rate cut at the December BoE meeting, consistent with our own forecast. The upcoming budget in a few weeks remains a key uncertainty for both the BoE and GBP.

In equities, US stocks fell sharply, with the S&P 500 losing 1.66% and the Nasdaq dropping 2.29%, as reduced expectations for a December Fed rate cut weighed on sentiment. The probability of a rate cut fell to 51% after hawkish comments from Fed officials emphasised the need for restrictive policy to address inflation. Concerns about stretched valuations in tech stocks also contributed to the selloff. The decline in US stocks triggered a broader global equity selloff, with Asian markets also down sharply; Japan's Nikkei fell 1.5%, and South Korea's KOSPI dropped 2.8%.

Equities: Global equities sold off sharply yesterday, with MSCI World down more than 1%, triggering a flood of speculative explanations across financial media, most of which simply do not hold.

There were no relevant macro data releases, and any narrative around the end of the U.S. government shutdown would, if anything, have been marginally supportive.

This was not a macro-driven move. What we saw was yet another instance of a volatility-driven market, centred around rising uncertainty in the AI complex and a rotation out of high-multiple equities.

The most telling part being U.S. equities underperformed, led by Tech down more than 2% while Healthcare and Energy both traded higher. This is precisely the inverse of the multi-year pattern in which Tech has dramatically outperformed both Healthcare and Energy.

This rotation story backed by, min vol, defensive, quality outperforming and VIX moving higher.

Further cross asset moves confirming that the move was not about deteriorating fundamentals.

Yields rose, which wouldn't happen in a negative-macro setup.

Oil prices increased, and gold fell.

Small caps outperformed large cap.

Some commentators blamed shifting expectations around a potential December Fed cut. But if the Fed doesn't cut, the reason would be a strong labour market, which is cyclical positive. Hence, this at best a questionable explanation and not long-term sustainable.

If Fed does not cut in December, it should be seen as positive for equities and not negative.

In the US yesterday, Dow -1.7%, S&P 500 -1.7%, Nasdaq -2.3% and Russell 2000 -2.8%.

Asia followed the same script overnight. Markets were broadly lower, with South Korea, this year's best-performing market, fell nearly 4%, a classic rotation unwind.

European futures are down this morning; U.S. futures are marginally higher.

FI and FX: Hawkish remarks from several Fed members yesterday turned risk appetite to the worse. Markets are now pricing a Fed rate cut at around 50% probability, and we still call for unchanged US key policy rates in December. Overnight rates have fallen back somewhat but continue to trade above levels 24 hours ago. Interestingly, the USD suffered during the risk-off with EUR/USD moving above 1.1650 before retracing the move slightly overnight. The Scandies FX have done remarkably well amid the risk-off with NOK benefitting from oil prices rebounding on renewed Russia-sanction supply concerns. The GBP traded heavy following stories that Chancellor Reeves contemplates dropping the plans to raise the income tax rate.