EU summit in focus as Zelensky addresses leaders

In focus today

• In Brussels, the EU leaders' summit continues today, with Ukraine in focus as President Zelenskyy is due to address EU leaders amid rising tensions between Kyiv and Washington. Leaders are expected to discuss Ukraine's funding needs for 2027, while high energy prices, the EU budget and trade measures against China remain on the agenda.
• In Sweden, Statistics Sweden's Labour Force Survey (LFS) is in focus. Employment rose clearly in August, and today's release includes the less volatile quarterly figures alongside the monthly statistics. We place greater weight on yesterday's figures from the Swedish Public Employment Service, which showed a continued decline in unemployment to 6.4% and redundancy notices remaining below their historical average.
• In the US, September industrial production and import prices are due in the afternoon.
• In the euro area, the final September inflation print is due, and we expect it to confirm the flash estimates of 3.8% y/y in headline inflation and 2.5% y/y in core. The release also lets us asses the underlying inflation measures, which so far has remained very stable despite higher energy costs. 

Economic and market news

What happened overnight

In the US, Fed Chair Warsh gave no hint of the October policy decision at the IMF annual meetings in Bangkok. He said he does not prejudge meetings and does not believe in saying now what he might do at the meetings left this year, adding that the Fed is "not in that business anymore". He neither endorsed nor pushed back on recent signals from other FOMC members that there is no rush to hike this month but repeated that the September hike made very clear the Fed would deliver price stability and remove a dose of accommodation.

What happened yesterday

On Ukraine, tensions with the US deepened after President Zelenskyy said Ukraine would resume strikes on Russian oil refineries, ending a brief pause linked to President Trump's proposed energy truce. Ukraine hit a refinery owned by state oil company Rosneft in Russia's Ryazan region after Russia continued heavy drone and missile attacks on Ukraine's energy infrastructure Zelenskyy also said US early-warning intelligence and Starlink functionality had been curtailed, although Trump denied cutting intelligence sharing. The dispute highlights Ukraine's reliance on US technology and adds to geopolitical and energy market uncertainty.

In the US, September PPI surprised clearly to the upside, with core PPI rising to 5.0% y/y (cons: 4.4%). The details were less alarming than the headline suggests. The upside came from the volatile trade services category and transportation-related components, while the underlying measures were broadly unchanged, leaving limited evidence that inflation momentum is broadening beyond energy-related categories. That likely explains the muted initial market reaction.  

Core retail sales increased less than expected, rising 0.1% m/m in September (cons: 0.3%, prior: 1.2%), signalling somewhat weaker underlying consumption than last month. The headline increased more expected, but this was mainly driven by higher expenditures at gasoline stations, which rose 6.4% m/m SA. In nearly all consumption categories outside gasoline stations, the monthly growth rate ticked lower compared to August.

In the UK, the economy continued to surprise to the upside. August GDP rose 0.1% m/m (cons: -0.1%), following a very strong summer, and y/y growth is now above 2% for the first time in four years. After several strong months for services, industrial production was the key driver of the modest pickup this month. The solid data lower the cost of an insurance hike from the BoE in November, which is now almost fully priced in.

In Sweden, inflation expectations ticked up in the Origo survey, with the 1Y CPIF horizon rising to 2.2% from 2.1% while the 2Y and 5Y horizons were unchanged at 2.1%.

Equities: Equities staged a substantial turnaround yesterday. Despite selling pressure in Asia and during the European session, US indices closed higher following sizeable intraday swings. Perhaps most interestingly, the reversal came without any major news catalyst, reinforcing our view that recent price action reflects uncertainty and nervousness more than a fundamental shift. The rebound did not interrupt the rotation, however. Equal weight S&P500 outperformed market cap weighted indices by almost 1%, defensives beat cyclicals, and the AI unwind continued, with SOX declining for a seventh consecutive session.

Rotation remains the dominant theme against a backdrop of strong macro and earnings data. Combined with oil having eased and stabilised, that leaves a more constructive overall picture. The positive tone continues this morning, with Asian equities advancing and European and US futures trading higher.

FI and FX: US Treasury yields fell despite stronger PPI data and higher equities. Fed signals still suggest rates are likely to stay on hold in October, while in Europe, long-end swaps moved lower, and ECB officials reiterated caution on inflation. The USD weakened as yields declined, with EUR/USD trading near 1.12, while AUD underperformed after unemployment rose unexpectedly. We remain negative on AUD, SEK and NOK versus USD, driven by high energy prices, Fed tightening and a peak in global manufacturing momentum. In Scandinavia, we see scope for lower borrowing needs in Sweden and recommends buying 2Y SGB ASW versus selling 10Y SGB ASW. NOK performed well against USD, mainly due to broad USD weakness rather than NOK-specific strength.