Focus on PMIs and inflation

In focus the week

Today is quiet on the data front. The week ahead will focus on inflation, with the UK print on Wednesday likely being a deciding factor for whether a Bank of England rate cut is on the table in November. On Friday, the euro area October flash PMI report will be released, followed by the delayed US September CPI reading and US October flash PMIs.

Economic and market news

What happened overnight

In Japan, newly elected LDP president Sanae Takaichi looks to have found her new coalition government. With the support from the Japan Innovation Party (Ishin), Takaichi should have enough votes to secure another LDP-led government in a parliamentary vote tomorrow. Ishin wants social security reform, lower VAT and a smaller parliament. LDP staying in power means that the largest opposition party, The Constitutional Democratic Party, which has previously advocated for the Bank of Japan to lower its inflation target and hike interest rates faster, will not gain influence. The yen weakened on the outlook of a dovish PM, a move also supported by global risk-on sentiment this morning.

In China, the monthly data release showed Q3 GDP growth slowing to 4.8% y/y from Q2 5.2% y/y in line with consensus expectations. Industrial output growth was the main surprise at 6.5% y/y (cons: 5.0%) from 5.2% in August. The domestic economy remains weak, with house prices down by 2.2% y/y and private consumption continuing to struggle.

What happened over the weekend

In the Middle East, Israel stuck Hamas targets in Gaza in retaliation for an armed attack which killed two Israeli soldiers. Israel has halted incoming aid until Monday, and the truce remains uneasy. Hamas announced its commitment to the ceasefire and stated it was unaware of any attacks in the region where the Israeli soldiers were killed.

In the euro area, the final HICP print confirmed the flash release of 2.2% y/y in September while core inflation was revised up slightly to 2.35% y/y from 2.34% y/y. The uptick in headline inflation in September was mainly due to energy base effects. We expect it to fall back to 2.0% y/y in the final quarter of the year as the energy outlook remains soft, while core inflation is expected to stay at 2.3% y/y.

In Sweden, the September labour force survey was slightly weak. The labour force declined to 5.238M from 5.320M in August, while the unemployment rate fell by 0.1% to 8.7% m/m. Earlier last week, labour market data from SPES offered some encouraging signs. SPES figures for September showed lower unemployment and an improvement in labour demand, while redundancy notices increased only slightly and continued to trend downwards.

Equities: Equities rebounded in the US on Friday to close out a volatile week dominated by earnings and renewed concerns around potential credit losses in the US banking sector. Financials were at the centre of attention, notably, insurance was the weakest performing industry of the week, while banks did better, backed by solid results from the large US banks. Those earnings helped stabilize sentiment and provided some support to the sector overall, even as worries linger around smaller regional lenders. In the US on Friday, Dow +0.5%, S&P 500 +0.5%, Nasdaq +0.5%, Russell 2000 -0.6%. Asian equities are trading notably higher this morning, led by cyclical and export-oriented names after more conciliatory comments from Trump ahead of renewed US-China trade discussions this week. In Japan, markets are rallying close to 3% as an LDP-led government under Takaichi looks increasingly likely, notably, without any material yen reaction so far this morning. Futures are pointing higher in both the US and Europe.

FI and FX: US yields generally edged higher on Friday, despite a downward trend through most of last week, as markets showed signs of relief with risk assets rebounding following recent concerns around regional banks' credit exposure. Despite several sources of uncertainty, markets continue to perform notably well. In the days ahead, attention will turn to another round of US-China trade talks, led by Vice Premier He Lifeng and Treasury Secretary Scott Bessent. On the data front, the continued absence of key government releases due to the shutdown will see one notable exception - Friday's September CPI print. The US repo market came under pressure last week. Most noticeably, the SOFR fixing rose outside the Federal Reserve's target range for the EFFR. EUR/USD fell below 1.17 after trending higher for most of the week amid broad USD weakness. EUR/CHF broke firmly below 0.93 during Friday's session as concerns about US regional banks surfaced. Markets are still digesting the announcement of central bank certificates in Norway. As expected, the primary reaction has been in basis markets and so far, the FRA/Nowa widening has been close to our expectations.