All eyes on US election and central banks

This week's data showed continued growth in the US and euro area in Q3, with the US GDP rising 2.8% q/q SAAR and euro area GDP increasing 0.4% q/q, surpassing expectations. Growth in the euro area was influenced by the Olympics in France and a revision of Germany's Q2 GDP. Without these factors, growth in these economies was flat, while Spain showed robust growth. In China, the October composite PMI rose to 50.8, signalling a recovery from the summer slump, driven by gains in both manufacturing and non-manufacturing sectors.

Tensions in the Middle East remain elevated after Israel retaliated against Iranian military sites following an attack on 1 October. However, the targeted response, which avoided energy infrastructure, was seen as less provocative, leading to a drop in oil prices. In Japan, the ruling coalition lost its Lower House majority, creating political uncertainty as it now requires support from other parties, which have criticized recent Bank of Japan (BoJ) rate hikes. Despite this, we expect the BoJ to continue rate hikes in December, as indicated at this week's meeting, even though rates were left unchanged. In the UK, the Labour government's first budget revealed a significant increase in borrowing over the next five years, pushing 10-year Gilt yields 20bp higher and reducing expectations for a backto- back rate cut by Bank of England in December.

Euro area inflation increased to 2.0% y/y in October (cons: 1.9%, prior: 1.7%) driven by energy and food inflation, while core inflation was unchanged at 2.7%. Core inflation rose 0.20% m/m s.a. driven by still elevated service price increases of 0.30% m/m s.a. while goods prices remained unchanged at 0.0% m/m s.a. The October data thus showed that the very soft services inflation registered in September was a “blip” and inflation dynamics remain the same as we saw in the first months of Q3, namely with momentum in underlying inflation heading slowly in the right direction. Services inflation remains sticky on the back of elevated wage growth, which is supported by the strong labour market as also indicated by the unemployment rate, which dropped to an all-time low of 6.3% in September.

Next week, all eyes are on the US election. The first state results are expected a couple of hours past midnight on Wednesday European time, and by morning, around 70% of states had been called in the previous 2020-election. Donald Trump is the favourite to win the presidential election according to prediction markets, Republicans are expected to win majority in the Senate elections and House elections remain highly uncertain. The final swing state polls pointed towards a very close race for the White House and results from Pennsylvania, Michigan and Wisconsin, where results are likely to be known only late Wednesday, will likely play a key role in the outcome. We host two webinars on the morning Wednesday 6 November, which you can sign up for here and here.

On Thursday, focus turns to central banks as both Fed, BoE, Norges Bank, and the Riksbank have meetings. We expect both Fed and BoE to cut rates by 25bp in line with analyst consensus and market pricing. In both places, focus will be on forward-looking guidance especially in the UK after the recent jitters caused by the government’s budget. For details, see Fed preview: Navigating uncertain waters, 1 November. On Friday, we should finally get the actual numbers on China’s fiscal stimulus, which Reuters sources this week said could be 10 trillion yuan in extra debt the coming years.

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