ECB kept rates steady as euro area growth strengthens

In focus today

• In the euro area, flash inflation data for October is set to be released. Yesterday, inflation in Germany and Spain surprised to the upside, with headline inflation reaching 2.3% y/y and 3.2%, respectively. Consequently, we now expect euro area HICP inflation to remain steady at 2.2% y/y in October, revising our initial estimate of a decline to 2.1% y/y.  
• In Norway, we expect the seasonally adjusted unemployment rate to remain unchanged at 2.1% in October. However, a slight increase in the number of fully unemployed people suggests that the labour market is gradually softening. Additionally, keep an eye on the number of new vacancies, which has been on an increasing trend after the summer. This may indicate that employment may rebound later in the fall.

Economic and market news

What happened overnight

In China, the manufacturing PMI for October fell to 49.0, remaining in contraction territory as weaker new orders pointed to fragile demand. The data reflected pre-National Day holiday demand and fading front-loading to the US. Meanwhile, the non-manufacturing PMI stayed slightly above 50, signalling stabilisation without a strong rebound. The data suggests that additional stimulus measures may be needed to bolster domestic demand.

In Japan, Tokyo inflation accelerated to 2.8% y/y in October, up from 2.5% in September, driven primarily by higher water charges. The faster pace of inflation bolsters the case for the Bank of Japan to continue its gradual interest rate hikes, sustaining market expectations of a potential near-term increase. Meanwhile, retail sales rose 0.5% y/y in September, below the expected 0.8% growth.

What happened yesterday

The ECB kept its policy rates unchanged, with the deposit facility rate at 2.00%, as expected by markets and consensus. The inflation outlook remains broadly unchanged, and no new guidance was provided. President Lagarde noted that several downside growth risks have eased, citing the US-EU trade deal and improved US-China relations. We maintain our view that the ECB will keep policy rates unchanged in 2025 and 2026. For details see ECB review - Abated downside growth risks, 30 October.

In the euro area GDP grew by 0.2 % q/q in Q3, exceeding expectations, and improving from a 0.1% q/q increase in Q2. This outcome aligns with signals from earlier country-level data. While detailed drivers of growth are not yet available, exports were the primary contributor to growth in France and Italy, whereas domestic demand drove the expansion in Spain. The ECB's September staff had anticipated 0.0% q/q growth, making this a positive surprise for policymakers and supporting the view that current interest rates are "in a good place." We expect the euro area economy to maintain a similar growth pace in the final quarter of the year, as October PMI data suggests sustained momentum. Meanwhile, the unemployment rate held steady at 6.3%, which, together with rising real incomes, continues to support household consumption.

Inflation data from Germany showed a slight upside surprise in October, with headline inflation at 2.3% y/y (cons: 2.2%) down from 2.4% y/y in September. While energy and food inflation eased, core CPI inflation remained stable at 2.8% y/y, as services inflation rose to 3.5% from 3.4% y/y. The persistence of services inflation in Germany provides a mildly hawkish signal. Similarly, inflation in Spain also surprised to the upside, with headline inflation rising to 3.2% y/y (cons: 3.0%). As a result, we now expect euro area HICP inflation to have held steady at 2.2% y/y in October, contrary to our initial estimate of a decline to 2.1% y/y. 

In Sweden, the NIER Economic Tendency Survey rose for the fourth consecutive month in October to 100.8, surpassing its historical average for the first time since July 2022. Consumer confidence increased for the sixth month to 96.8, nearing normal levels but still held back by cautious views on major purchases. Manufacturing confidence edged up to 100.2, aligning with its historical average, highlighting broad-based economic improvement.

Equities: Equities drifted lower through much of the trading session yesterday with S&P500 down -1%, Nasdaq -1.6% and Russell 2000 -0.8% respectively. However, futures are up since the close due to strong earnings particularly from Apple and Amazon. In particular Amazon and its cloud services was strong. With more than 60% of S&P companies have reported their Q3 earnings, it's fair to argue that this reporting seems to turn out strong, with strong E's (almost) across the board. Defensives, led by consumer staples, are underperforming cyclicals, but that is also as expected in the current macroeconomic backdrop. Overnight equities are mixed with Nikkei up 1.7% (amid higher-than-expected inflation) and Shenzhen down 1% at the time of writing. 

FI and FX: Fixed income and FX markets are largely stable overnight, following a busy week with central bank meetings. EUR/USD dropped below 1.16 in yesterday's session and has traded in a range of 1.1560-1.1580 since yesterday afternoon, with the ECB meeting having little impact on the pair. While US data releases continue to be postponed due to the government shutdown, PCE inflation data is scheduled to be released today. In Norway, today's attention will be on the labour market report and Norges Bank's announcement on the daily FX transactions for November. As for the SEK, monthly rebalancing flows should entail some moderate SEK-selling over month-end.