All eyes on US CPI

In focus today

Today's most important data release will be the US October CPI, where we expect inflation to slow down in both headline (+0.1% m/m SA, from +0.2%) and core (+0.2% m/m SA, from +0.3%) terms. In annual terms, headline inflation could still appear to accelerate due to base effects stemming from a low reading a year ago (headline forecast 2.5% y/y, from 2.4%).

In the euro area, focus turns to industrial production data for September, which will show how actual production fared. The data is interesting as hard data has been better compared to PMIs in the manufacturing sector.

In Sweden, Riksbank minutes will be released at 09.30 CET. Since the decision to cut by 50bp was unanimous, all board members appear to stand behind the message in the monetary policy update that indicated a weaker real economy that led to the jumbo cut. Still, we look for any cracks in the façade and expect Riksbank to move more slowly going forward.

Economic and market news

What happened yesterday

In the US, the NFIB's small business optimism index showed a slight improvement in overall sentiment in October, increasing to 93.7 from 91.5. General uncertainty reached an all-time-high ahead of the election, but we have seen similar movements ahead of previous elections as well. Labour market indicators were little changed, while job openings and hiring plans remained slightly below pre-pandemic levels. Similarly, inflation indicators saw only minor changes, with firms' "price plans"-index staying just slightly above pre-covid levels. Overall, US businesses remain in good shape especially now that political uncertainty is set to gradually ease.

In politics, the Republicans moved closer to clinching the House, with Edison Research projecting another race win, bringing them to at least 216 seats - just two seats short of the 218-majority threshold. Winning the House would complete a Republican sweep, giving Trump full leverage to proceed with his agenda. As noted earlier this week, this scenario could widen the budget deficit, public debt, and potentially lead to renewed inflationary pressures.

In the euro area, Olli Rehn, Finnish central bank chief, said that the ECB is likely to continue cutting rates, potentially reaching the neutral level in H1 2025. While the direction is clear, Rehn highlighted that the pace and size of cuts will depend on the inflation outlook, the dynamics of underlying inflation and monetary policy transmission. We believe that November PMIs will weigh more heavily than usual on the size of the December ECB rate cut, where we project a 25bp cut.

In Germany, the ZEW indicator declined in November, with the downtick being broad-based. The assessment of the current situation declined further to -91.4 (cons: -85.0, prior: -86.9), its lowest level since May 2020. Similarly, the expectations component fell to 7.4 (cons: 13.2, prior: 13.1), indicating that last month's uptick was temporary. It shall be very interesting to see whether PMIs and Ifo for November mirror this development as was the case in October when all measures improved. Overall, we remain negative on the economic outlook for Germany as the manufacturing sector continues to record falling activity. A clear risk for the growth outlook is a significant deterioration in the labour market, which is weakening as visible in Q3 where employment declined for the first time since Covid, and an increasing number of companies are using short-term working schemes.

On the political front, the leaders of Germany's major parties have agreed to host the snap elections on 23 February 2025. Later today, German Chancellor Scholz is expected to announce the date of a vote of confidence in the government, which likely could happen on 16 December. For more details regarding the political disarray in Germany, please see Research euro area: Fiscal policy to slow growth in 2025 - but mind the RFF, 7 November.

In the UK, BoE Chief Economist Huw Pill (hawk) emphasized that the central bank's efforts to tame inflation are not over, given persistent underlying inflation momentum. Pill highlighted Tuesday's labour market data, which showed continued sticky wage growth, underscoring that BoE still has work to do on inflation. The labour market report also showed the unemployment rate ticking higher to 4.3% in the most recent three-month period, slightly above consensus of 4.1% and the previous figure of 4.0%. However, this is related to the very low June figure of 3.7% dropping out in September. Given that the measure is also based on the low-quality LFS data, focus should be on wage growth. Looking ahead, next week's October inflation release is key, where we will likely see a slight increase due to energy price adjustments. We remain positive on GBP, targeting EUR/GBP at 0.81 in 6M.

In commodities space, OPEC lowered its forecast for global oil demand growth for 2024, while also trimming its 2025 projections, owing to weaker activity in China and other Asian markets. The cut marks the cartel's fourth consecutive downward revision in the 2024 outlook. For the remainder of 2024 we expect the oil price to climb higher towards USD80/bbl.

Equities: Global equities declined yesterday, led by significant selloffs in Europe and Asia. Some of the "Trump trades" are still ongoing, but as mentioned previously, also some China-related rotations are going on, with materials sectors experiencing the most significant losses across indices. Notably, despite the downturn in global equities, yields were higher, cyclicals outperformed, and the VIX moved slightly lower. This suggests that the market is not fearful of the growth outlook but is instead adjusting to a new reality. In the US yesterday: Dow -0.9%, S&P 500 -0.3%, Nasdaq -0.1%, and Russell 2000 -1.8%. Most Asian markets are lower this morning, as are most European and US futures.

FI: The US-German yield divergence continued to 206bp on the 10y point, which is 6bp wider than on Monday. European real rates rose markedly with e.g. the 5y5y EUR real swap rate up 6bp on the day.

FX: US yields continued to climb, diverging substantially from euro area rates and pushed EUR/USD temporarily below 1.06 for a new year-low. Scandies showed resilience versus the euro but lost out against the greenback. The Chinese yuan also weakened against the USD as an reflection of the anticipation of new US tariffs hitting China over the next year.