France avoids rating downgrade

In focus today

In Germany, we received the Ifo indicator for October. Friday's flash PMIs still pointed to decent growth momentum at the start of Q4, although the composite fell slightly short of expectations as weaker services outweighed a positive surprise in manufacturing. We expect the Ifo to paint a similar picture, with a slight improvement in the assessment of the current situation, while expectations are likely to ease.

In Sweden, producer prices for September will be published this morning. PPI rose broadly in August, increasing by 0.9% m/m and 6.8% y/y, with petroleum products making the largest contribution. We pay particular attention to prices for plastic and rubber products, which serve as a useful leading indicator of consumer goods prices.  

 In China, industrial profits for September are released overnight. Profit growth slowed to 4.2% y/y in August, but the rebound in the manufacturing PMI and higher PPI inflation point to a recovery in profit growth in September, likely driven by raw materials and the chip sector. 

For the rest of the week, focus turns to interest rate decisions from the Fed on Wednesday, the ECB on Thursday and the Bank of Japan on Friday, where we expect all three to keep interest rates unchanged before resuming rate hikes later this year. In the UK, the 2027 budget on Wednesday could gather attention ahead of the BoE's November meeting, as inflation concerns coupled with stronger growth could trigger a hike. Data highlights include US Q3 GDP on Thursday and inflation data for the big euro area economies as well as Q3 GDP data for the whole area on Friday.

Economic and market news

What happened overnight

In commodities, Brent crude has eased to below USD115/bbl this morning after surging to near six-month highs last week. The decline reflects hopes of easing hostilities between the US and Iran, after Qatari mediators travelled to Tehran on Sunday as part of an effort to de-escalate regional tensions in coordination with the US. Trump said it is "getting to be decision time" on whether to make a deal with Tehran or resume attacks. However, he has not dispelled market expectations that strikes on Iran could follow after the midterm elections, and attacks on Saudi Arabia continued over the weekend.

In Latin America, Lula won a historic fourth term in Brazil's presidential runoff on Sunday, with 51.76% of the vote, defying polls that had given a slight lead to Flávio Bolsonaro, who has refused to concede and said he would launch a legal challenge. Brazilian assets had rallied on the prospect of Bolsonaro's more pro-business policies, and a Brazilian real futures contract fell 10% on Sunday evening, while ETF tracking Brazilian stocks dropped nearly 15% in Japan. Lula's re-election is also to blow up US ambitions for greater influence in the region.

In Venezuela, opposition leader María Corina Machado returned from exile on Sunday, posing a challenge to the US-backed interim government led by Delcy Rodríguez, and is likely to push for new elections.

What happened over the weekend

In the euro area, the flash PMIs fell slightly more than expected in October but continue to point to decent growth at the start of Q4 despite somewhat softer momentum. The composite PMI fell to 51.9 (cons: 52.7, prior: 53.1), similar to the levels in July and August. Manufacturing declined marginally to 52.4 (cons: 52.8, prior: 52.9), while services fell significantly to 51.7 (cons: 52.5, prior: 53.0). The service price indices continued to show limited spillovers from energy prices as both output and input fell slightly in October. In manufacturing, input costs rose more strongly again, while output price growth remained stable. With growth still decent and signs of limited pass-through from energy costs to underlying inflation, the report supports the ECB's gradual hiking approach, with a stocktaking meeting on Thursday and the next hike in December.

Also in the euro area, Moody's kept France's rating unchanged at Aa3 with a negative outlook late on Friday, despite wide market expectations of a downgrade. The decision assumes that a deficit-reducing 2027 budget will be adopted and that financing costs and social tensions will abate somewhat in the coming months. Moody's expects a deficit of 5.2% of GDP next year, down from the 5.4% the government expects this year but slightly above its 5% target. The protests, which Moody's warned could constrain fiscal consolidation efforts, continued over the weekend, albeit more calmly than the week before, and unions have called for a nationwide strike on 5 November.    

In the US, the S&P Global flash composite PMI declined slightly to 57.6 in October from 58.4, but overall business activity remained strong. Manufacturing came in higher than expected at 56.0 (consensus 55.5, prior: 55.9), while services declined to 57.9 (consensus 58.0, prior: 58.8), roughly as expected. Manufacturing selling prices rose at the sharpest pace since 2022, sending a somewhat concerning inflation signal, and 2Y Treasury yields rose on the release. In services, price pressures looked more contained, with output prices rising only marginally and input prices ticking down slightly from an elevated level in September. Overall, the report is not nearly enough to change our forecast for an unchanged rate decision at Wednesday's Fed meeting.

In the UK, the flash PMIs strengthened in October, with both services and manufacturing picking up. The composite rose to 53.1 from 52.0 as services increased to 53.1 from 52.1 and manufacturing edged up to 52.8 from 51.9. The details were also encouraging, with new orders growing at the fastest pace in over two years and employment returning to growth for the first time since September 2024. At the same time, input cost inflation rose to its highest level since June, mainly driven by higher energy, raw material and transport costs in manufacturing. However, part of the manufacturing gain reflected longer supplier delivery times, pointing to supply-chain disruptions rather than stronger demand. Overall, the print leans to the hawkish side for the BoE ahead of its November meeting.

In Denmark, business sentiment fell to 104.5 in October from 107.1 in September, the lowest level in four months, though still above the historical average of 100. The decline came mainly from retail, where sentiment eased from a very high level, while industry sentiment improved for a fourth consecutive month and now points to growth. Overall, this suggests the economy is growing at a more normal pace than the strong GDP figures indicate, but clearly faster than weak consumer confidence would imply.

Equities: Equities finished down on Friday, with S&P 500 -0.5% and Stoxx 600 -0.3%. Unlike Thursday's AI selloff, tech stabilized with semis and memory largely higher. Instead, it was breadth that was negative after a strong equal-weight outperformance. Tech and real estate the few sectors in green, while most sectors were in red. Consumer staples sold off the heftiest after a strong run recently, on top of higher energy prices.

FI and FX: On Friday, Moody's announced that France's rating is kept on hold at Aa3, but still retaining the negative outlook. This was surprising and could possibly help ease the pressure on French government bonds. EUR/USD seems to have taken a breather around 1.12 for now, but we expect the cross to move gradually lower from here. Last week's winner in G10 FX was, once again, the Norwegian Krone, benefitting from both higher energy prices and resilient domestic data. With EUR/SEK seemingly finding a trough around 11.10, NOK/SEK broke above 1.06 for the first time since late 2022. Looking ahead to the rest of the week, central bank decisions including the Fed, ECB and BoJ will be key market drivers.