Higher rates beginning to weigh on demand

In focus today

The ECB will release the minutes of its September monetary policy meeting, offering insight into the Governing Council's (GC) discussions. Although Lagarde's emphasis on energy prices at the press conference prompted a strongly hawkish market reaction, subsequent comments from GC members have softened that tone. Even so, we expect the minutes to retain a bias towards further tightening.

In the US, Fed's Waller (permanent voter) and Kashkari (voting in 2026, not in 2027) will be on the wire.

Economic and market news

What happened yesterday

In the US, the September FOMC minutes contained no major surprises. All participants supported the 25bps rate hike, while most saw another hike as likely appropriate by year-end, supporting our view of a further hike in December. Almost all participants viewed inflation risks as tilted to the upside, while labour market risks were broadly balanced. The minutes also highlighted solid economic momentum, with AI-related investment supporting business investment. Markets reacted modestly, with a slightly lower probability of an October hike.

Also in the US, higher mortgage rates are beginning to weigh on housing demand, as long-end mortgage rates have risen well above 7%. Mortgage applications declined to the lowest level since February 2025, with both purchase and refinancing demand under pressure. The data highlights that interest rate-sensitive parts of the economy are being affected by tighter financial conditions, even as AI-related capex remains strong. This supports the case for the Fed to proceed gradually rather than deliver back-to-back rate hikes.

In Sweden, flash inflation for September came in slightly below expectations, with headline inflation at 0.9% m/m and 1.2% y/y (cons.: 1.0% m/m, 1.2% y/y, Danske: 1.0% m/m, 1.3% y/y) and core inflation at 0.1% m/m and 0.5% y/y (cons.: 0.3% m/m, 0.7% y/y, Danske: 0.4% m/m, 0.8% y/y). While services prices came in below expectations, goods prices surprised to the upside. Energy was broadly in line with expectations and food prices slightly lower. SEK weakened marginally on the release.

In Norway, the government published key figures from its 2027 fiscal budget, with the budget indicator at 0.0%. The Ministry of Finance sees an overall effect of 0.1-0.2pp of GDP, implying a slightly expansionary budget but close to neutral for the monetary policy outlook. The oil-adjusted deficit is expected at NOK 561.7bn and petroleum taxes at NOK 359bn. Based on this, we expect Norges Bank to buy NOK 213bn, or NOK 890m/day, on behalf of the Petroleum Fund in 2027. The proposal still needs a parliamentary majority, leaving some upside risk.

In commodities, European diesel prices jumped sharply after IEA members agreed to accelerate the release of oil stocks announced in March but clarified that the plan would not exceed the 400m barrels already committed. Around 100m barrels are still to reach the market, with members set to prioritise diesel where possible amid tight markets and supply disruptions from the Iran war. The move therefore mainly brings forward already pledged volumes rather than adding fresh supply, which disappointed markets.

Also in commodities, Strait of Hormuz traffic fell to its lowest level in more than two months, with Kpler reporting just seven commodity vessels transiting on Tuesday after tanker attacks last week reached their highest level since the Iran war began. Crude flows through the Strait were down 27% from the wartime high the week before. However, higher exports from the Gulf of Oman and Red Sea are helping offset the decline, keeping up overall regional crude exports.

In Poland, the National Bank of Poland (NBP) kept its key rate unchanged at 3.75%. The decision allowed the NBP to adopt a wait-and-see approach as elevated inflation is offset somewhat by government measures aimed at reducing fuel prices. The NBP also signalled that they may intervene in the FX market.

Equities:  Equities retreated somewhat after a strong start to the week and new all-time highs. The US recovered into the session, helped by stabilising yields, with the S&P 500 down a meagre 0.2%, while the Stoxx 600 closed down a full 1%.

This was a classic risk-off session, with all sectors lower and defensives outperforming. Health care, utilities, and staples all finished higher, while industrials and materials were the worst performing sectors. However, it was not all growth scare, and fears around yields were still visible, with real estate underperforming. Tech continues to hold up well, although it has not been the same driver as in the past month.

FI and FX: There was a renewed rise in European government yields yesterday led by France and we saw a bearish steepening which is "consistent" with the increased government spending financed by debt. US yields initially rose, but later in the day declined some 5-6bp. There was strong demand at 10Y auction, but it is difficult to see the long end rally significantly given all the supply. Tonight we the 30Y auction where the Treasury will sell USD 22bn. Furthermore, the oil price rose as the US is looking at options to strike Iran ahead of the mid-terms and the oil price is above USD 102. This morning the long end of the US Treasury curve rose a few bp in Asian trade.

In the currency market, there was the usual risk-off sentiment, where the Euro weakened against the USD, but it has bounced back this morning and is above the 112-level. USDJPY is trading around the 158-level this morning.