Ukrainian concessions key in US peace proposal as pressure builds

In focus today

In the euro area, November flash PMIs are due. In October, the services PMI rose to 53.0 while manufacturing reached 50.0, moving out of contraction territory. The developments suggest positive momentum for the euro area heading into Q4, and we expect the November PMIs to remain unchanged from October's.

We also receive the ECB's indicator of negotiated wages for Q3, which is heavily influenced by last year's one-off inflation bonuses. Q2 negotiated wages rose 4.0% y/y (up from 2.5% in Q1) due to base effects, but we expect a sharp decline to 2.2% y/y in Q3, as signalled by the ECB's wage tracker. Wage growth is trending lower, supporting reduced services inflation.

In Sweden, data for capacity utilisation, gross investments, inventories, and the inventory-adjusted production value index for Q3 are being released. The production value index has shown strong performance, supporting the notion that the recovery is progressing slightly better than anticipated. The inventory adjustment is unlikely to change this outlook.

Economic and market news

What happened overnight

Ukraine-Russia, the 28-point peace plan proposed by the US to Ukraine seems to heavily favour Russia, requiring significant Ukrainian concessions and capping its military at 600,000 troops. Although NATO membership is ruled out, the possibility of EU accession remains open. While the plan's security guarantees are vague, additional documents reportedly include NATO-like assurances. With Ukraine facing mounting pressure on the battlefield, the likelihood of a ceasefire this year has increased, potentially further supported by robust guarantees.

In Japan, new PM Takaichi has approved a supplementary budget worth JPY21.3 trillion, representing the largest stimulus package since the pandemic. The runup to this has weighed heavy on the yen recently and pushed longer-dated JGB yields higher. Also overnight, nationwide CPI inflation excluding fresh food increased a bit to 3.0%, confirming the uptick from the Tokyo data. The weak yen will continue to push for high import prices, which adds to speculation that the Bank of Japan will soon hike rates again. We are also closing in on a situation where FX intervention to support the yen is once again on the table. This is a government decision, though, not the central bank's.

 What happened yesterday

In the US, September NFP rose by 119k (cons: +50k), while August was revised down to a 4k decline from +22k. Despite stronger-than-expected NFP, the unemployment rate increased to 4.4% from 4.3%, driven by a rise in the native US-born labour force (+636k) and a decline in immigrant workers (-166k). This supply-driven increase in unemployment eased labour market tightness, triggering a dovish market reaction with UST yields slightly lower and EUR/USD rising. However, we do not view this as a strong dovish signal for the Fed or expect the trend to persist. We still expect the Fed to stay on hold in December, with markets currently pricing around 32% probability of a cut.

In Denmark, GDP grew 2.3% q/q in Q3, driven by Novo Nordisk's pharmaceutical export, excluding pharma, growth was a modest 0.7% q/q. Domestic consumption remains weak despite rising real incomes, we expect consumption to pick up eventually, driven by rising real wages, but the timing remains uncertain. Future GDP growth will depend on Novo Nordisk, while broader conditions remain stable with low unemployment and solid demand.

Consumer confidence dropped to -20.1 in November, a 2.5-year low, reflecting economic concerns and inflation fears. Despite easing food prices, Danes perceive inflation as much higher than 2%. Record household savings could drive spending if optimism improves, though current data suggests this is unlikely soon.

In the euro area, November's flash consumer confidence held steady at -14.2, slightly below expectations of -14.0. Weak confidence continues to weigh on consumption growth, despite supportive fundamentals such as rising employment, lower rates, and increasing real incomes.   

In Norway, Norges Bank's Q4 expectations survey showed slightly higher inflation expectations on 12M and 2Y, which is not ideal but unlikely to shift policy given recent inflation volatility. Labour organisations raised wage expectations for this and next year, though average wage growth forecasts for 2025 (4.4%) and 2026 (3.9%) remain below Norges Bank's September MPR projections.

Equities: Global equity markets experienced a pronounced rollercoaster yesterday. After rising roughly 1.6% heading into the early afternoon, supported by the latest US data releases, sentiment abruptly reversed, sending major indices sharply lower. MSCI world ultimately closed down around 1.1%, marking an almost 3% peak-to-trough swing on the day. S&P500 ended -1.6% lower, Nasdaq -2.2% and Russell2000 -1.8%. The only sector offering resilience was consumer staples, buoyed by Walmart's strong Q3 earnings beat. Despite already elevated expectations and a PE higher than the Mag7, Walmart outperformed and offered a rare pocket of stability (Walmart +6.5%).

Overnight, Asian equity indices are down this morning except Japan due to its announced fiscal stimuli, see below.

Volatility surged as defensive sectors outperformed cyclicals in the sea of red. The VIX briefly spiked above 28 on an intraday level before settling at 26.4, which is the highest level since April. Few need to be reminded of market developments then, yet it is important to recognize the significant uncertainty from the equity markets this week. Importantly, this episode is concentrated within equity markets; in contrast, bond-market volatility actually declined yesterday, and the VIX/MOVE-dynamics have decoupled. Overall, the market dynamic was not a classic flight to safety albeit there was not a clear catalyst for the abrupt intraday reversal. Speculation continues whether this is the ongoing AI capex story or profit taking, yet this lacks hard economic fundamental justification at this stage.

FI and FX: The US September jobs report was a mixed read, but with US yields declining 4-5 bp across the curve, the interpretation was mainly to the dovish side. EUR/USD drifted slightly higher but is still lower on the week. Nvidia's earnings report supported risk sentiment initially, but roughly halfway through the US session we saw a huge intraday reversal with the Nasdaq falling 5% from its intraday highs and the S&P500 closing at a weekly low. The sudden risk-off impacted FX markets, where especially commodity-currencies felt the strain, with EUR/NOK rising sharply towards 11.80. EUR/SEK, on the other hand, saw only limited moves yesterday and remains firmly anchored at 11.00.