Draghi calling for more fiscal integration in the Eurozone

Market movers today

Today, we only have a few data releases. We get retail sales out of Norway and unemployment data for the euro area and Germany. The latter in particular will be interesting given the weakness we have seen in some parts of the German economy.

In terms of economic data releases this week, we look for a small rebound in ISM manufacturing and a further moderation in employment growth to around 100,000. We expect the flash release for euro area inflation to have fallen to 0.9% in September from 1.0% in August. We also get PMI manufacturing and service sector indicators from most countries this week.

The focus is also on politics with the UK Conservative Party Conference taking place and the impeachment process of US President Trump. Also look out for any announcement on trade ahead of the trade negotiations next week.

Selected market news

In an interview with the Financial Times published on Sunday, ECB President Mario Draghi backed Emmanuel Macron's proposal from earlier in the year of a more highly integrated fiscal regime in the Eurozone that includes, among others, a common Eurozone budget and fiscal transfers between member states. Although Draghi acknowledged that the debate still has a long way to go, he was 'optimistic' following the recent austerity measures taking place in many countries in the Euro Area, further signalling the need for more coordinated fiscal measures to the general public. Draghi also reiterated the latest ECB communication on a need for fiscal expansion to play a larger role in order to relieve pressure on monetary policy, with the alternative being non-standard policy measures having to play a large role for an extended period of time despite generating adverse income effects (i.e. larger savings) and asset price inflation. Lastly, with regards to the recent stimulus package, Draghi acknowledged the downside of further monetary stimulus, but added that the positive consequences still outweighed the negative ones.

In Austria, Sebastian Kurz, the leader of the conservative ÖVP, is set to return as chancellor for the alpine state following Sunday's Nationalratswahl (National Council election). The preliminary results show ÖVP obtaining 37% of the popular vote, up from 31% in 2017 (34% expected). This comes largely at the cost of coalition partner FPÖ, with ORF.at reporting that a fifth of the party's voters from 2017 chose to vote for ÖVP on Sunday (and another one out of five chose not to vote at all). The right-wing party thus only obtained 16%, down from 26% in 2017. Although the majority obtained by Kurz and ÖVP was greater than expected, forming a coalition could prove difficult following comments from FPÖ stating that they did not see the results as a mandate to resume in government, meaning that the social democrats (SPÖ), registering the worst election result to date, or GRÜNE would be the only alternative. Only a single minority government has ruled since 1945.

The Fed funds effectively fell to 1.85% on Friday, from 1.90% on Thursday as both of the Fed's liquidity providing operations (O/N and 2W term repos) came in undersubscribed.

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