Tensions rise after killing of Yahya Sinwar

In focus today

Swedish September LFS is expected to show a small increase in the unemployment rate to 8.4 % SA. That said, we will rather keep an eye on employment and hours worked which should recover after the summer lull.

Economic and market news

What happened overnight

In China, Q3 GDP grew 4.6% y/y in July-September, which is the slowest pace since early 2023, showcasing need for more support and undershooting Beijing's target of 5%. The monthly batch of data showed stronger than expected industrial production at 5.4% y/y (cons: 4.5%) and retail sales at 3.2% y/y (cons: 2.5%). Moreover, the Central Bank of China initiated its two-stage funding schemes in which they are utilizing newly created monetary policy tools to pump USD 112.38bn into the stock market. 

In Japan, the core inflation (CPI excl. fresh food) for September was slightly above expectations (2.3%) printing 2.4% y/y. The slowdown from last month's figure of 2.8% was largely due to government intervention of temporary rollouts.

In the Middle East overnight, Hezbollah announced a 'new and escalating phase' in its confrontation with Israel, while Iran said the spirit of resistance would strengthen following Israel's reported killing of Hamas leader Yahya Sinwar on Thursday. Sinwar, who became Hamas' leader after Ismail Haniyeh's assassination in July, was seen as the mastermind behind the 7 October attack on Israel.

What happened yesterday

In the euro area, as expected ECB cut rates for the third time this year to bring the deposit rate to 3.25%. The weakness in the incoming economic data since the last governing council meeting was acknowledged by Lagarde, and that data led to a further confidence on the inflation path being on track which led to the rate cut. Yesterday's decision was unanimous. Markets traded mostly sideways through the press conference as no guidance of how aggressive, or potential end point of the cutting cycle was given. For more details, please see Flash: ECB Review - A rate cut - and awaiting more data, 17 October.

Prior to the ECB meeting, the final inflation data for September printed a 1.7% y/y confirming the low inflation momentum, driven by services, which supported the ECB's assessment.

In the US, the September retail sales growth surprised to the topside. Control group sales grew by +0.7% m/m SA. However, the seasonal adjustment factor provided unusually strong lift to the monthly figures, and the y/y growth rate in non-seasonally adjusted terms declined to 2.7% (from 3.9%). The bottom line is that US private consumption remains on a solid, but still cooling trend. Markets have also paid close attention to the jobless claims data. Surprisingly, the number of weekly initial claims declined to 241k (from 260k) even though the data should now cover at least the initial impact from hurricane Milton.

In Norway, Norges Bank's Ida Wolden Bache held a speech to the Centre for Monetary Economics (CME) BI in the Norwegian business school where she discussed the options that Norges Bank is considering when it comes to the liquidity regime shift starting in 2025 as the government will no longer sterilise the seignorage of Norges Bank by issuing bonds. The assumption has been that this will lead to a rise in reserves in the system (when the government spends money on the budget), but Bache opened the door for limiting the rise in the FX reserves as option number 2. Essentially this is a decision of whether the liabilities side or the asset side of the balance sheet should take the adjustment - and this could have a market impact. If they opt for an asset side control it would be positive for NOK FX and positive for FRA/Nowa. We therefore enter a tactical long

In Denmark, as expected the Central Bank followed ECB 1:1 and cut its policy interest rate by 25 bp to 2.85%.

In Turkey, the CBRT kept their key policy rate at 50% as expected by markets.

FI: Markets added to rate cut bets ahead of the December ECB meeting - now 30bp vs 25bp prior to the meeting - following Lagarde's dovish remarks on the disinflationary process and a Bloomberg story suggesting that ECB officials see another cut at the next meeting as 'highly likely'. 2Y German yields headed lower through the press conference, but the move reversed in the last part of the session with levels slightly higher by the close. Long-end rates rose across Europe and the US as US retail sales and claims data both came out stronger than expected. German ASW-spreads continued to grind lower with the Bund ASW-spread now trading just above 21bp.

FX: Industrial-sensitive currencies lead losses in yesterday's session with a dovish twist to the ECB communication driving additional EUR losses. EUR/USD continues to trend lower while USD/JPY has breached the 150-mark on higher US yields. The NOK found some much needed support in the latter part of the session which also contributed to a rebound in NOK/SEK.