US ISM and Swiss inflation on today's menu

In focus today

• In the afternoon, US ISM Services index is due for release. While the index has been volatile over the past years, flash PMIs released earlier signalled still solid growth in services sector activity in September.

• In Switzerland, we get inflation data for September. Consensus expects a drop to 1.0% in headline inflation (from 1.1%) and core to remain steady at 1.1%. This should leave inflation in line with the SNBs Q3 forecast at 1.1%. In line with the SNB, we expect inflation to continue to edge lower into the lower end of the inflation target range of 0-2%.

Economic and market news

What happened overnight

In Japan, the newly appointed Prime Minister, Shigeru Ishiba, stated it is too early for additional rate hikes after meeting with Bank of Japan (BoJ) Governor Kazuo Ueda. Ueda echoed this, saying the BoJ will move cautiously on rate hikes, and board member Noguchi stressed the need to maintain a loose monetary policy. As of this morning, USD/JPY is trading around 146.85 after the dovish remarks.   

What happened yesterday

In the US, ADP private sector employment growth for September exceeded expectations at 143k (cons: 120k), with the August figure being revised up to 103k (prior: 99k). Gains were broad-based occurring in leisure and hospitality (34k), construction (26k) and education and health services (24k). While on a cooling trend the past months, the reading suggest that labour market conditions remain solid. The print also points to a potentially decent labour market report on Friday, where we forecast NFP at 160k, slightly above consensus.

In the euro area, the unemployment rate remained at 6.4% in August as expected, with the number of unemployed persons declining by 94k. This indicates that the labour market remains historically strong. The decline was driven by a reduction in Spain, Italy and Greece, while the number of unemployed increased somewhat in Germany and France. Despite the low unemployment rate, more timely indicators show that recent employment growth has cooled or turned negative, reflecting an overall stagnant private labour market. Germany and France face the weakest labour markets, and largest risks of employment declines, while growth is expected to continue in Spain, Portugal and Greece.

ECB board member Isabel Schnabel noted that euro area inflation is increasingly likely to approach the 2% target amid signs of softening labour demand and further progress in disinflation. On the other hand, the Portuguese central bank chief Mario Centeno warned of the risk of undershooting its target, which could hinder economic growth.

In France, President Emmanuel Macron backed a temporary tax on the country's largest firms to support his new government's strategy. The French government unveiled plans for an EUR 60bn budget squeeze via spending cuts and tax hikes next year to curb the spiralling budget deficit and stabilise the country's financial outlook.

In Poland, as widely expected, the Monetary Policy Council kept its key policy rate steady at 5.75%.

In commodities space, the oil price remained bid amid concerns of supply disruptions from potential Israeli retaliation against Iran. Albeit OPEC+ is still weighing a December output increase, supported by recent price rises. Rising supply should help balance sentiment in the oil market amid escalation of the ongoing conflict in the Middle East.

Equities: Global equities were flat yesterday, with China being the regional exception, experiencing a sharp rise in Hong Kong. It is somewhat intriguing to observe both European and US equity markets being flat amidst substantial uncertainty across various parameters, including politics, geopolitics, macroeconomics, and monetary policy. In other words, all the elements are present that could potentially drive volatility higher as well as trigger significant movements in either direction for equities. The US job market data is a major catalyst in this context, and we will gain more insights on this front both today and tomorrow. In the US yesterday, the Dow closed up 0.1%, the S&P 500 slightly up by 0.01%, the Nasdaq increased by 0.1%, and the Russell 2000 decreased by 0.1%. The Chinese market's honeymoon appears to be over this morning, with markets down approximately 3% in Hong Kong. Conversely, in Japan, stocks are up more than 2% following dovish monetary statements, which have led to a renewed weakening of the yen. Futures in Europe and the US are lower this morning.

FI: There was a decent rebound in global bond yields and interest rates yesterday as 10Y US Treasury yields rose some 5bp and the curve steepened between 2Y and 10Y as well as 2Y and 30Y on the back of better-than-expected US labour market data and rising oil prices. We have seen a similar move in European government bond yields where yields rose, and the curves steepened from the long end. Furthermore, the Bund ASW-spread tightened once again.

FX: Risky assets saw some stabilisation despite continued geopolitical stress. Oil prices remained bid, although Brent closed some 2% below the intraday high. NOK/SEK pushed above 0.97 once more and the yen had a rough session following dovish remarks from new PM Ishiba, with USD/JPY rising 2% on the day. NBP left rates unchanged amid accelerating inflation with EUR/PLN trading close to our 1-3M target of 4.30.