The Japanese Yen trades a tad stronger this morning at USD/JPY 151.60

Markets

EUR/USD 1.0778 lives to fight another day. The technical support level survived October PMI surveys. Disappointing French numbers forced a test early on European dealings, but a better German reading and a close to consensus EMU gauge (2nd consecutive month below neutral 50-level though) balanced things out. Investors took it as a first sign to stop adding to ECB policy rate cut bets for now. The market implied probability of an acceleration to a 50 bps rate cut in December stands at 33% with the deposit rate expected to dip below the 2% neutral level in H2 2025. We continue to find this path too aggressive. The ECB’s monthly consumer survey offers a second piece of information today via inflation expectations (1y & 3y forward). Both remain stuck above the central bank’s 2% inflation target, respectively at 2.7% and 2.3%, but are gradually grinding lower. We doubt they’ll be gamechangers though. Next week will be more interesting with Q3 GDP data and October inflation figures. Over summer, there’s been a discrepancy between very bad EMU sentiment data and less bad hard numbers. The PMI-based nowcast hints at flat GDP growth in Q3, but the actual number could reach 0.2% Q/Q or even 0.3% Q/Q. Such reality check could also slow or even partly reverse trends set in motion in the wake of last week’s policy rate cut. Inflation is equally set to undo September’s dip below the 2% inflation target as base effects will push CPI higher going into year-end. When the spotlight turns away from euro weakness, it will take dollar strength to pull EUR/USD below 1.0778. The greenback had a stellar run since the start of the month, both driven by US data outperformance and by Trump’s solid polling going into presidential elections. Yesterday’s good eco figures (declining jobless claims and solid (services) PMI couldn’t inspire dollar bulls though in a sign that the greenback could shift into lower gear as we approach the combination of payrolls (Nov 1), elections (Nov 5) and Fed meeting (Nov 7). US durable goods orders are today’s only highlight on the US agenda.

News and views

Inflation in Japan’s capital city Tokyo eased from 2.1% to 1.8% in October. Energy was the main driving force behind the deceleration. Government subsidies for energy costs shaved about half a percentage point from the overall index. This also caused a slowdown in the gauge excluding fresh food from 2% to 1.8%. An even narrower gauge (ex. fresh food and energy) actually unexpectedly accelerated from 1.6% to 1.8%. The monthly 0.6% pace was the quickest in over a year. Services inflation edged up from 0.6% to 0.8%, led by price rises in public services. Price developments in the public sector are seen as more rigid than in the private sector, suggesting the wage-price spiral is materializing in that part of the economy too. The Tokyo indicator points at continued underlying inflationary momentum and is considered a good indicator of where the national trend is headed. That should trigger further hikes by the Bank of Japan, though not at next week’s October 31 meeting. Its governor Ueda in the sidelines of the IMF and World bank annual meetings yesterday said the central bank has time to consider its next steps. That makes December the earliest candidate for a third rate hike (by 25 bps this time?) this cycle. The Japanese yen trades a tad stronger this morning at USD/JPY 151.6 as it heads into Japanese general elections on Sunday. The ruling LDP risks losing its majority for the first time since 2009.

UK GfK consumer confidence eased to the lows seen earlier this year. The indicator fell from -20 to -21 in October with households becoming gloomier on the broader economic outlook despite seeing an improvement in their personal finances on dropping inflation. The back-to-back decline was an extension to last months’ steep 7 point drop which GfK attributed to speculation about the tax and spending plans in the Chancellor’s upcoming Budget statement (October 30). UK consumers’ saving intentions picked up from 23 to 27. The GfK’s major purchase gauge improved slightly but remains at a relatively low level nonetheless.

Download The Full Sunrise Market Commentary