In focus today

In the euro area, we expect the ECB to keep policy rates unchanged, with the deposit rate at 2.50%, in line with consensus and market pricing. We expect Lagarde to retain full optionality on the future rate path and offer no firm guidance, limiting the market reaction. We will watch for potential communication on the minimum reserve requirement (MRR) and the operational framework, which is important for money markets but not for the broader macro story. For details, see ECB Preview - October pause; MRR in focus, 20 October. We also receive the European Commission's business survey for October, where firms' selling price expectations are the most important data to follow. Irish Q3 GDP is also due, which will be important for interpreting tomorrow's aggregate euro area GDP figure. In Q2, Irish GDP rose 10.2% q/q and accounted for more than half of euro area growth. As Ireland is neither representative of the euro area economy growth nor important for the ECB's outlook, we focus on euro area GDP excluding Ireland.

 In Japan, we expect the Bank of Japan (BoJ) to keep rates unchanged at 1.25% early Friday, but to deliver the next hike in December. While gradually building inflation pressures and a solid recovery support further tightening, the BoJ's cautious approach makes a hold look certain. The meeting also brings a new outlook report, and a big batch of data is released beforehand, including October Tokyo inflation and September retail sales.

In the US, we expect Q3 flash GDP to show growth of 3.4% q/q SAAR. This would suggest that our full-year GDP forecasts of 2.1% in 2026 and 1.8% in 2027 from the latest Nordic Outlook are too low, mainly due to upward revisions to consumption growth in H1 2026. September PCE inflation is also released. As with CPI, headline PCE likely picked up on a further rise in energy prices, and we will mainly look for signs of inflation broadening beyond energy components.

In Sweden, the NIER's quarterly barometer is released, where firms' inflation expectations will be in particular focus. The GDP indicator for Q3 is also due, with consensus expecting growth of 0.3% q/q, or just under 3% y/. Finally, August wage data are released after wage growth surprised to the downside in July, falling to 2.9% from 3.7%, partly due to a lower benchmark level. The figures should provide more clarity on the pace of wage growth going forward.

Economic and market news

What happened overnight

In Japan, consumer confidence fell slightly more than expected in October to 35.0 (cons: 35.1, prior: 35.4), the lowest since July. Sentiment weakened across all major components, including households' views on income growth and employment prospects. The figures come ahead of the Bank of Japan's rate decision early on Friday.

What happened yesterday

In the US, the Fed kept policy rates unchanged at 3.75-4.00% as expected, with Hammack and Cook dissenting in favour of a 25bp rate hike. The statement was largely unchanged, although the upgrade of the economic activity to a "strong" pace from a "solid" pace marked a slight hawkish shift. At the press conference, Warsh said that growth was probably above 3% in Q3, while also flagging the recent tightening of financial conditions and offering no specific guidance on the future rate path. Although the market reaction was to the dovish side, we read Warsh's comments on the economic outlook as hawkish. We maintain our call for 25bp hikes in December and March, with risks tilted towards more than two hikes. For details, see Research US - Fed Review: Fed pauses, but tightening cycle is not over, 28 October.

In the UK, Chancellor John Healey presented a Budget broadly in line with expectations, stressing that he will honour the fiscal rules and that the package is fully funded. Healy blamed the war for rising prices and pressure on public finances, with the OBR forecasting an additional GBP14bn in debt interest spending this year, although it also revised up its growth forecast. Fiscal headroom is reduced to GBP15bn in 2029/30 from around GBP23bn in March, while net financial debt is expected to rise to 83.8% of GDP in 2027/28 before falling to 83.1% of GDP in 2029/30. To help with energy bills, around 20 million households will receive a GBP100 payment, the VAT cut on electricity bills is extended to July and gas standing charges will be scrapped. On the revenue side, the bank tax rate will rise to 6% from 3%, while taxes on gambling, property and savings income will also increase, with dividend tax rates left unchanged.

In commodities, European natural gas prices climbed to around EUR100/Mwh, above last week's top and the highest level since December 2022 during the energy crisis that followed Russia's invasion of Ukraine. The drivers remain familiar, with uncertainty around supplies from the Middle East and very tight European inventories. In addition, Northern European wind energy production has declined again after the stormy weekend. Brent crude traded around USD116/bbl, close to last week's top, amid prevailing concerns about Gulf supplies and as Netanyahu looked set to stay in power, having raised the prospect of renewed joint military action with the US against Iran. On the other hand, with both the Fed and the ECB expected to tighten further, monetary policy should keep a grip on demand and counter the upward pressure on prices from tighter supply.

In Canada, the central bank lifted its policy rate by 25bp to 2.50% as expected, its first hike since July 2023. Governor Macklem pointed to a substantially higher inflation outlook and a resilient economy, as the BoC raised its 2027 inflation forecast to 3.1% from 2.0% and lifted its growth forecast for this year to 1.0% from 0.7%.  The bank also signalled that further tightening might be needed to prevent soaring energy costs from fuelling broader inflation but stressed that the bank would proceed carefully given the uncertainties. USD/CAD and the 2Y swap rate was about unchanged on the news.

In Norway, retail sales fell less than expected in September, declining by 0.4% m/m (Danske: -0.7%, prior 0.6%). The decline partly reflects a correction after the lift in August and takes the underlying trend (3M/3M) to 0%. Retail sales have thus resumed the downward trend seen since January, with lower real wage growth, higher mortgage rates and, not least, increased savings as the main factors behind the slowdown. Retail sales are now down 1.1% y/y.

Equities: Equities ended higher on Wednesday, with the S&P 500 up 0.3% and the Stoxx 600 up 0.7%. The AI trade rebounded for the third straight session, and gaining new momentum as SK Hynix surprised positively on earnings and particularly on extended demand visibility. However, what was more interesting was what happened after hours, with Alphabet and Microsoft reporting. It was a mixed bag, but when it comes to AI, revenue forecasts were surpassed again. Starting with the negative, Alphabet missed earnings estimates, driven by weaker results in the core search advertising business. For the AI revenue stream, Google Cloud revenues more than doubled and surpassed estimates. But as the core business disappointed while AI spending accelerated, free cash flow was sharply negative instead of close to break-even, as consensus had estimated, and the stock fell 10% after hours, although the takeaway was not necessarily negative for the general AI trade. Microsoft, on the other hand, was strong across the board. The AI business, Azure cloud, grew 48% and generated about USD 19 billion in free cash flow, which was USD 10 billion more than analysts expected. So, quite the opposite conclusion from Alphabet, and this is increasingly setting Microsoft apart from Alphabet and Meta, or CoreWeave and Oracle for that matter, whose AI investments are dependent on more borrowing.

Another conclusion from the hyperscaler reports is that capex plans are no longer jacked up further, as was the case with Meta last week, and similarly, Alphabet and Microsoft did not hike capex estimates yesterday. This is a trend shift from previous quarters. This is not necessarily negative for hyperscalers themselves, nor the general data centre supply chain, as markets are questioning current capex estimates. As long as they are realised, it is enough for a positive trigger for the AI trade. However, unchanged capex guidance also means that we should not see the same rally in earnings revisions following reporting as in earlier quarters, when higher capex spending immediately triggered higher estimates in the data centre supply chain and, not least, within semiconductors. The reaction to the hyperscaler reports is, all in all, slightly negative today, with the Kospi down 0.7%. Nasdaq futures are down 0.9%. However, in light of the big moves within the AI trade lately, these are surprisingly small moves.

FI and FX: The Fed left rates unchanged, as expected, however Warsh's lack of commitment towards a December hike caused short-dated US yields to decline and the USD to weaken, however modestly. We expect a similar lack of surprise from today's ECB meeting, which should also consist of unchanged rates and a lack of clear forward guidance. Overnight, also BoJ is expected to keep rates unchanged. Scandies remain supported, with NOK being the clear outperformer as NOK/SEK set yet another multi-year high, this time above 1.07.