German IFO expectations are expected to be unchanged in October

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Focus will be on the ECBâ€™s asset quality review and stress test, which were released yesterday. Overall, we expect a muted positive reaction, as capital shortfalls were less than expected, ECB comprehensive assessment: Capital shortfall less than expected, 27 October 2014.
The European banking sector will get additional attention, as bank lending and money supply figures are due for release. We expect the lending to non-financial corporations to show a continued decline in the pace of deleveraging.
German IFO expectations are expected to be unchanged in October. Although the German PMI increased in October, the upside risk should be limited, as history suggests we need to see a period of smaller declines or stabilisation before the index moves higher again and we have not seen this yet.
During the rest of the week, focus will be on the Fed meeting, where the â€˜considerable timeâ€™ forward guidance is likely to be reiterated. In the euro area inflation is set to increase to 0.6% y/y in October from 0.3% y/y in September. The Swedish Riksbank is expected to cut the policy rate by 15bp to 0.10% and to present a significantly flatter rate path.

Selected market news

With about 20% of the votes counted, the pro-EU parties are set to win the majority in the Ukraine parliament. President Petro Poroshenkoâ€™s bloc and Prime Minister Arsenity Yatsenyukâ€™s Peopleâ€™s Front both received around 21% of the votes, while former president Viktor Yanukovychâ€™s allies received close to 10% of the votes.

Dilma Rouseff won a narrow victory in her re-election campaign, receiving 52% of the votes. Rouseff is thus set to begin her second term as Brazilâ€™s president.

Twenty-five banks failed the long awaited ECB stress test and asset quality review, including nine in Italy, four in Greece and three in Austria. Overall, capital shortfall among the European banks participating in the review was probably less than expected and the results are therefore likely to be met with a positive reaction by the markets.

Song Guoqing, an academic member of Peopleâ€™s Bank of Chinaâ€™s advisory committee, said over the weekend that economic growth in China may slow to 7.2% y/y in Q4 and land at 7.3% y/y in 2015, hence, that a moderate growth slowdown awaits the Chinese economy.a

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