The US election remains a major uncertainty for China's economic outlook

Markets

US market moves suggested investors reduced the ‘established Trump-trade’ to position to a more neutral one with a survey showing Harris potentially taking the lead in Iowa driving the move. After rising substantially on Friday, US yields faced a material setback in Asia and most of this this was maintained later in the session. US yields declined between 4.5 bps (2-y) and 10.3 bps (30-y). However, with the broader picture still pointing to a close neck-and-neck race, it’s useless to draw any conclusions. It probably was nothing more than the erratic swings one can expect in thinned market conditions ahead of major event risk. A $58 bln US Treasury auction was awarded at 4.152%, slightly above the WI bid (4.143%), slightly reinforcing the underperformance of bonds at the short end of the US yield curve. German yields changed between +1.7 bps (2-y) and -4.9 bps (30-y). EMU interest rate markets after last week’s higher than expected EMU Q3 growth and CPI data are coming to understand that it won’t be evident for the ECB to accelerate the pace of rate hikes to a 50 bps step at the December meeting. The dollar copied the electionrelated setback in US yields. After closing at 104.28 on Friday, the DYX index tested the 103.6 area to finish the day off the intraday lows at 103.88. EUR/USD filled offers north of 1.09, but later also returned part of the intraday gains to close at 1.0878. Similar story for USD/JPY (close 152.13 from 153.01 on Friday). US equities lost modest ground (S&P 500 -0.28%). Brent oil tries to regain the $75 bp handle. After outperforming the euro on Friday, sterling yesterday hovered around the EUR/GBP 0.84 pivot as markets look forward to the BOE’s assessment on fiscal policy at Thursday’s policy meeting/monetary policy report.

Asian equities trade mixed to positive this morning with China outperforming. The China Caixin Services PMI improved more than expected from 50.3 to 52.0. The outcome supports confidence that recent stimulus measures might help a rebound in domestic demand. However, the US election also remains a big source of uncertainty for the overall performance of the Chinese economy going forward. On ‘global markets’ US yields are trading marginally higher (<1 bp) as investors are counting down to the outcome of the US elections. The dollar is holding little changed (DXY 103.9). In a ‘normal context’ one would today mention the US services ISM as interesting last input for this week’s Fed meeting, but investors won’t feel inclined to adapt positions on the basis of whatever important eco data series at ahead of the election event risk. Later this session, the US Treasury will sell $42 bln of 10-y notes.

News and view

The Reserve Bank of Australia remains one of the hawkish outliers amongst central banks. The central bank kept its policy rate unchanged at 4.35% this morning as underlying inflation (3.5% Y/Y in Q3 2024) remains too high and isn’t expected to sustainably return to the midpoint of the 2-3% inflation target range until 2026. This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. The forecast is backed by a judgement that aggregate demand remains above the economy’s supply capacity, the mere persistence of core price pressures, surveys of business conditions and ongoing strength in the labour market. Weak output growth is expected to recover from H2 2024 onwards, but that outlook remains highly uncertain. Australian money markets put the probability of a first rate cut in February, when new forecasts are available, at roughly 40%. A full 25 bps rate cut is only discounted by the May 2025 meeting. AUD/USD is marginally stronger this morning at AUD/USD 0.66.

Data from the British Retail Consortium (BRC) show that total UK sales increased by 0.6% Y/Y in October, down from 1.7% in September and below 1.4% consensus. Food sales were 2.9% higher Y/Y with non-food sales 0.1% Y/Y lower. The disappointing result can be partly explained by a later October half-term in England, mild weather (deterring spending on winter clothes) and by uncertainty before the budget and rising energy bills. The promotional weeks around Black Friday will be the first real test of post-budget consumer sentiment.

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