ECB decision and Eurozone Q3 growth take centre stage

In focus today

In the euro area, today brings a packed agenda with the ECB meeting, the first Q3 GDP estimate, October flash inflation for Germany and Spain, and unemployment data. We expect the ECB to hold rates steady at 2.0%, with Lagarde signalling no change in the outlook, aligning with market expectations. Growth risks appear balanced, and while no rate cuts are anticipated in 2026, they cannot be completely ruled out. We expect euro area GDP to have expanded 0.1% q/q (1.2% y/y) in Q3, supported by stable PMI readings. Spain's strong performance, with 0.6% q/q growth driven by robust domestic demand and rising employment, provided a boost, while Ireland's slight contraction of 0.1% q/q highlights the ongoing effects of earlier export front-loading. We expect the unemployment rate to have stayed unchanged at 6.3% in September amid a steady labour market. We get the first indications of October inflation as Germany and Spain release flash estimates ahead of the euro area data tomorrow.

Following strong Swedish GDP data and a sharp PMI rise, today's NIER survey will be key in confirming economic improvement. Collected earlier this month, the data reflects the Riksbank's September rate cut and the government's expansionary budget. A lack of further improvement in household sentiment would be disappointing. We're also watching corporate inflation expectations and pricing plans as key inflation indicators.

Overnight, Japan will release data on retail sales and October Tokyo inflation. Private spending has slowed considerably over the recent months as food inflation has eroded purchasing power. However, with wage growth gradually improving, we will watch for signs of a recovery in spending.

Overnight China will release the official PMI figures for October, covering both manufacturing and non-manufacturing. In September, the official manufacturing PMI lagged behind the private (RatingDog PMI). This month, we expect a slight improvement, with the manufacturing PMI edging above the 50 threshold from 49.8 in September. Meanwhile, the non-manufacturing PMI has remained stable for months, and we anticipate a similar trend in October, weighed down in part by weakness in the construction sector.

Economic and market news

What happened overnight

Following US-China trade talks, Trump and Xi indicated progress towards stabilising trade relations, highlighting a 'basic consensus' on key issues such as soybean purchases, rare earth exports, and fentanyl trade. According to comments from the US-side, Trump plans to lower tariffs on China to 47% from 57%, while Beijing agreed to resume US soybean imports and address fentanyl trade. However, export restrictions on US microchips remain unresolved, and Taiwan was reportedly not discussed. Trump plans another meeting with Xi in China next April. Despite marking a temporary trade war de-escalation, the deal is unlikely to significantly impact markets today.

The Bank of Japan (BoJ) kept rates unchanged in a 7-2 vote, with Takata and Tamura favouring a hike. Around 4bp of hikes were priced in before the meeting, leading to further yen weakness The BoJ's outlook remains unchanged, forecasting modest growth, inflation above target this year, 1.8% in 2024, and 2.0% in 2027. We maintain a hawkish BoJ outlook, expecting the next hike in December, contingent on improving wage and spending data. Attention now shifts to Governor Ueda's 07.30 CET press conference.

In the Netherlands, the centrist D66 party made significant gains in the Dutch elections, positioning itself as a likely leader in forming a government after the far-right PVV, led by Geert Wilders, lost support. With 76 seats needed for a parliamentary majority, at least four parties will be required to form a coalition, likely excluding Wilders' PVV, as mainstream parties have ruled out working with him. Coalition talks, which are typically tough, are expected to take months.

What happened yesterday

In the US, the Fed cut its policy rate by 25bp, as expected, and announced the end of QT on 1 December, neutralizing MBS runoff with T-bill net purchases. Powell delivered a hawkish message, emphasising that a December rate cut is far from certain due to differing committee views and a growing sentiment to delay further cuts. This led to a repricing of rate expectations, with the implied probability of a December cut dropping from over 90% to around 60%. EUR/USD fell to 1.16. We maintain our view of a pause in December and a cut in January. For details see Research US - Fed review: Hawkish cut, 29 October.

In Sweden, the GDP indicator for Q3 exceeded expectations, showing growth of 1.1% q/q and 2.4% y/y. Notably, three of the past four quarters have recorded positive GDP growth. If Q3 develops in line with the indicator, it would reinforce the recent upward-sloping trend - a welcome development after a prolonged period of stagnation. Our view is that the economy will continue to grow gradually from here.

In Norway, September retail sales fell 0.5 % m/m s.a., marking the first monthly decline in 2025. Gasoline was the main driver; excluding it, the drop was 0.2%. Despite supportive factors of higher real wages, low unemployment and lower mortgage rates, the decline was broader based among components but remains moderate with no major concerns.

Equities: Equities were virtually unchanged at yesterday's close relative to Tuesday's close. However, it was a zig-zag reaction during the Fed's press conference, erasing earlier gains from the day. Particularly Powell's hawkish message on December policy rate sent equities lower. Overnight, the Trump-Xi meeting was concluded with a partial deal, albeit an amicable tone was conveyed on both sides of the table. Trump even said he had an "amazing" meeting. S&P futures dropped about 0.6% following the conclusion of the meeting, albeit has recovered slightly following Trump's comment. Asian shares held up better and have recovered the knee-jerk reaction lower.

The much-awaited Q3 earnings of three of the Mag7 companies all surprised positively on the earnings relative to consensus, to a very significant degree. Google posting an earnings surprise around 30%, particularly driven by a surge in demand for cloud and AI services, while Microsoft was closer to 1%. And that seems to be the real story across the three reports; data centres and cloud services where e.g. Microsoft are lacking capacity.

We are now roughly half-way through the Q3 earnings reports, and taking stock of it seems clear that we are seeing a healthy earnings season, with better cyclical stocks' earnings reports than defensives.

FI and FX: A 25bp cut by the Fed and a halt to the QT program was followed by an unchanged rate decision from the Bank of Japan early this morning. ECB is expected leave the deposit rate unchanged at 2.0% when they announce their policy rate decision later today. Finally, Trump and Xi Jiping seemingly had a constructive meeting, resulting in concessions from both sides.