Crunch-time for EU-China trade talks

In focus today

In the US, September retail sales are due for release. After slowing in July, retail sales rebounded strongly in August. Another solid print in September would suggest that consumption made a strong contribution to Q3 GDP growth, which is released at the end of the month. September PPI is also due today. Early Friday Fed chair Warsh will take part in a discussion before the annual IMF meeting.

In EU-China trade, it is crunch-time for negotiations as EU leaders meet in Brussels today and Friday, with trade measures against China on the agenda. The EU has set a deadline for October for China to take initiatives to address the large EU-China trade imbalance. The summit follows a new round of talks between the EU-China trade delegations in China last week. Germany has recently hardened its stance on China, making it more likely EU leaders will agree on tougher measures.

In the UK, August GDP will be released, following July's 0.4% m/m expansion. Indicators point to continued growth, as retail sales rebounded and services activity strengthened, while manufacturing growth slowed and construction remained weak. Overall, this suggests another services-led increase rather than a broad-based acceleration.

Economic and market news

What happened yesterday

In the US, September CPI came in slightly hotter than expected. Headline inflation rose to 3.7% y/y (Danske: 3.6%, cons: 3.6%, prior: 3.4%) and 0.6% m/m SA (Danske: 0.5%, cons: 0.6%, prior: 0.4%), while core CPI rose to 2.6% y/y (Danske: 2.5%, cons: 2.5%, prior: 2.4%) and 0.3% m/m SA (Danske: 0.2%, cons: 0.2%, prior: 0.3%). The details looked less alarming than the headline and core numbers suggest. The upside was mainly driven by energy and shelter, while core goods were only slightly stronger than expected and super core services were in line with expectations. Markets initially reacted hawkishly to the release, with US yields moving higher, the dollar strengthening and investors raising the probability of an October Fed hike. We stick to our call for the Fed to remain on hold in October, mainly as financial conditions have already tightened significantly after the September hike and voting members may prefer to wait for more data. That said, the case for another hike is clearly present, as core inflation has firmed for a second consecutive month and downside risks to the labour market remain limited.

On the wires in the US, Fed's Vice Bowman (voter) said the Fed can take time to "wait and see" how financial markets and the economy evolve after the September rate hike before taking any further action. Following the CPI release, Fed's Barkin said the report was "higher than I would have hoped" but declined to project the outcome of the October FOMC meeting, noting that the PPI release will help inform his inflation outlook. Overall, the remarks suggest that Fed officials are avoiding any pre-commitment ahead of the October meeting, with incoming data key to the policy outlook.

In Sweden, final September inflation was broadly in line with the flash estimates. CPI came in at 1.149% y/y (flash: 1.150%), CPIF at 1.475% y/y (flash: 1.480%) and CPIF-XE at 0.539% y/y (flash: 0.530%). Within the details, weaker services prices appear to have been driven by car rental, as expected. Goods prices increased, despite IKEA having accounted price cuts from 1 September, with furniture prices rising 1.3% m/m. Prices for information and communication goods also rose notably, by 4.12% m/m. Overall, the rise in good prices could be an early sign that higher global price pressures are feeding through to consumer prices. Hence, low core inflation may not be as dovish for the Riksbank as it first appears.  

Equities: Equities fell again yesterday, led by AI and tech as semiconductor concerns and the unwinding of crowded positions continued to drive rotation.

Europe, defensive value and low volatility stocks outperformed, with European equities even closing higher. The S&P 500 registered its first daily move of at least 1% in either direction in 53 sessions, illustrating the subdued volatility preceding this adjustment. Our interpretation remains that resilient macro fundamentals favour a rotation narrative over a broader deterioration in the outlook. Defensives outperformed cyclicals by 3% yesterday and by more than 5% over the past five sessions, while staples have beaten tech by more than 10% over the past week. This is a familiar consequence of crowded positioning: when the long tech, short staples trade reverses, both sides amplify the move.

Crucially, the softer earnings have come from banks, while US tech releases, ASML and the data accompanying Anthropic's IPO process have been encouraging. The more tangible concerns remain among neoclouds, particularly CoreWeave, where material widening in credit spreads and CDS points to increasing investor unease. The unwind has intensified in Asia this morning, with the KOSPI down around 8% and trading temporarily halted earlier in the session. US and European futures are also lower, again led by tech and AI exposures.

FI and FX: European rates ended close to unchanged after the US CPI surprise as markets pared back hawkish Fed repricing. The USD also gave up much of its post-CPI rally, with investors focusing on softer underlying inflation details and rising growth concerns. SEK remained under pressure, while NOK was supported by higher gas prices, favourable technicals and carry.