Labour market turnaround adds pressure on BoE

In focus today

In the UK, September inflation will be released and is expected to pick up slightly compared to August where inflation was 3.1%. In August, core inflation remained unchanged at 2.6%, and so did services inflation at 3.4%. Domestic price pressures and wage growth are still easing, but external risks remain. Energy costs have risen and concerns are focused on potential second-round effects.

Economic and market news

What happened overnight

In commodities, Brent oil edged higher overnight and is now trading above USD110/bbl. revisiting levels seen earlier this week. Oil prices rose on Middle East supply concerns, with traders wary of Red Sea shipping risks and threats to oil infrastructure in Saudi Arabia. Oil prices have gained more than 10% this month as intensifying hostilities involving Saudi Arabia and Iran-backed Houthi forces, as well as Russia and Ukraine's attacks on energy infrastructure raised supply risks further.  

What happened yesterday

In Germany, the ZEW survey for October shows the brightest assessment of the current economic situation in close to three and a half years while expectations decline slightly. Expectations declined slightly more than expected to 28.1 (cons: 30.0, prior 34.7) while the assessment of the current situation rose much more than expected to -35.9 (cons: -44.5, prior: -47.1). Hence, the survey suggests that the recovery in the German economy is continuing in October which is a positive signal ahead of the PMIs on Friday. Higher energy prices and financial conditions likely lowered expectations but to a rather small degree. We published a new ECB call yesterday. We expect the ECB to keep policy rates unchanged on Thursday 29 October, with the deposit rate at 2.50%, in line with consensus and market pricing. Read the full preview here: ECB Preview - October pause; MRR in focus, 20 October.

In the UK, the latest labour market data were stronger than expected, with unemployment falling to 4.7% in August from 4.9% in July. Payrolls increased by 13K in September and the August job loss was revised to a small increase, taking some of the momentum off the labour market cooling. Private sector wage growth also increased slightly to 3.0% adding to the hawkish surprise. We expect the Bank of England to hike its Bank Rate in early November.

In the US, a notable drop in ADP's weekly employment growth measure suggests cooling in labour demand, as employment fell for the first time since early August. That said, we would need to see more than one reading before concluding that the positive trend in labour demand is over. On a positive note, the previous week was revised up.

In France, budget negotiations are dragging on after the first vote on the revenue side of the 2026 budget was postponed. With more than 2,800 of 3,400 amendments still to be examined, lawmakers were unable to proceed with yesterday's vote, and no new date has been set. Attention now shifts to the social security financing bill, where a first vote must take place by 27 October under the constitution. Overall, the timeline is becoming increasingly tight, making it even more likely that any final budget adoption will be delayed until December.

In Hungary, the central bank kept its rate decision unchanged at 5.50% in line with our expectations.

Equities: US equities ended yesterday modestly higher, although the headline performance masked another rotation beneath the surface. The S&P 500 gained 0.3%, the Nasdaq was flat, while the Russell 2000 outperformed with a 1.7% advance. Sector performance again had a defensive tilt, with healthcare leading the gains, while tech, industrials and communication services struggled amid lingering concerns over the AI investment cycle. The VIX declined further to 17.3, having approached 20 last week, pointing to a gradual easing in market anxiety.

After hours, and overnight developments challenge yesterday's rotation story though, as strong earnings have brought the AI trade back into focus. SpaceX and Super Micro Computer both delivered results exceeding of expectations, with their shares rising 8% and 16%, respectively, in after-hours trading.

FI and FX: The broad EUR selloff took a breather yesterday although the upwards pressure on energy prices and the French CDS continued. EUR/USD traded close to the 1.12 level, while EUR/NOK briefly set a new low around 10.52. Long-end yields dropped in both US, Germany and the Scandies. The 10Y German yield fell to 3.40% - the lowest level in about a month.