US housing market remains solid

Market Movers

• In the euro area, the calendar is crowded in terms of data releases and the week starts off with the German IFO expectations. So far, we have not seen any weakness in the indicator but we expect this development to be over and forecast a decline to 102.3. This is less than the recent sharp drop in ZEW expectations but more in line with the modest decline in the PMI figures. Besides the slowdown in emerging markets, the Volkswagen exhaust scandal is also to blame.

• At noon ECB’s Mersch will speak in Brussels on ‘The Challenges of Innovation’.

• In the US, new home sales for September will likely add to the recent series of data releases showing that the US housing market remains solid.

• There are no important data releases in Scandinavia today. Otherwise focus this week will very much be on central bank meetings with the Riksbank and the FOMC due Wednesday and Bank of Japan due Friday.

Selected Market News

Last Friday the People Bank of China announced a cut in the one-year lending rate and the one-year deposit rate by 25bp to 4.35% and 1.50%, respectively. Also, the cap on deposit rates was scrapped and the reserve requirement ratio was cut by 0.50pp. The decisions were in line with our expectation of further liberalisation of the Chinese financial markets and of further monetary stimulus, which also supports our view that the recent growth slowdown in the Chinese economy is likely to bottom in coming months. This will remove some of the pressure on major central banks to ease or postpone rate hikes as the negative impact of the Chinese growth slowdown has been an important factor in the recent deterioration in macroeconomic key figures in e.g. the US and Europe. Thursday’s dovish ECB and Friday’s announcement of additional easing by the PBoC have given significant support to almost all risk assets, not least stocks, credit, peripheral bonds and sovereign bonds. This morning close to all the major Asian equity indices are trading in green territory.

Going into the week where China’s leaders are to decide on a new five-year economic plan for the period 2016-2020, Premier Li Keqiang has stated that they will not ‘defend to the death’ the goal of 7% economic growth this year but that ‘the economy should operate within a reasonable range’.

According to Chinese officials, International Monetary Fund representatives have informed China that the yuan is likely to be included in the basket of Special Drawing Rights already this year. The basket is reviewed every five years.

In Poland, the veteran nationalist Kaczynski’s Law and Justice party (PiS) has won Sunday’s parliamentary election leading to the first change of government in almost a decade. The PiS campaign has been characterised by populist measures, euro-scepticism, critics of Moscow and promises to increase welfare spending. While the PiS-victory - according to exit polls - guarantees an outright majority in the lower house of parliament the PiS has not won enough seats to change the constitution.

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