Cruising economies and low volatility

The latest month’s macroeconomic data continues to signal that the global economies are cruising at more or less at their structural growth rates. The stability in economic data has resulted in continued low volatility in financial markets. Currently our focus is on the US labour market, which is experiencing a slowdown. Most indicators are consistent with the view that job growth is mainly slowing due to weaker supply growth not indicating an urgent need for more demand stimulus. Yet, the risk picture is shifting to the downside. The ADP report showed private employment growth stalling in both August and September against expectations of continued moderate rises. The Challenger report revealed that firms’ hiring plans continued to drop sharply. On the other hand, actual layoffs continued to decline while the JOLTs job openings data has landed close to expectations amid some volatility. Due to the US government shutdown, we have not received the non-farm payroll report. At the September Federal Reserve meeting the shift in the balance of risks was also the motivation for the 25bp cut. The cut was widely expected but the ‘dot plot’ revealed that the FOMC committee is almost 50/50 between members favouring one or no further rate cuts this year and those favouring two or more.

In contrast to the Fed, the ECB seems done with rate cuts, and that view was confirmed at their September meeting. Although the ECB staff projections estimated inflation below 2% on both headline and core measures in both 2026 and 2027, ECB president Lagarde downplayed the importance of this, mentioning it is due to temporary factors. We expect no more cuts from the ECB, and the September inflation data did not change our view since inflation came in as expected. Headline inflation rose to 2.2% y/y from 2.0% y/y due to base effects on energy inflation while core inflation held steady at 2.3% y/y. The monthly price increases, which shows the most recent momentum in inflation, were highly similar to the recent months. In terms of growth, the euro area September PMI gave a mixed picture with manufacturing declining to 49.8 and services rising to 51.3. We focus on the positive development in the services sector as it indicates domestic demand is holding up. After the very strong increases in manufacturing the first half of the year we had been expecting the improvement to lose steam in the end of the year as “front-loading” effects on exports to the US reverses. We forecast euro area GDP growth at 0.1% q/q in both Q3 and Q4, but the September PMIs suggest growth might even be a bit stronger in Q3.

In Asia, both China and Japan saw improvements in September data with the Chinese private manufacturing PMI rising more than expected supported by exports still holding up despite US tariffs. The data suggest that the weakness in PMI over the summer was partly affected by extreme weather. Yet, domestic demand is still weak and there is a further need to stimulus in the economy. In Japan, the Tankan business survey showed stable but high business conditions, which means BoJ can likely continue hiking the policy rate.

In September, the Draghi report on European Competitiveness celebrated its oneyear anniversary, but in our view, there is not much to celebrate. We published a deep dive in which we argues that only 20% of Draghi’s investment target will be reached, see Deep Dive Euro Area: European investments to rise by 1 percent of GDP, 12 September.

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