Weekly focus – ECB to cut rates again next week

Sentiment has been positive this week as markets continue to digest the strong US jobs report from the previous week, and as the conflict in Middle East has not escalated further. On the latter, Israel could launch its revenge attack against Iran any minute. A decision to target a high-ranking Iranian official or any of the country's oil or nuclear sites, would definitely mark an escalation, and Iran would be forced to respond. However, supply in the oil market remains ample, with substantial volumes of spare capacity in Saudi Arabia, so we see a low risk of higher oil prices even if tensions remain. Israel and Iran's tit-for-tat attacks might lift prices in a knee-jerk fear reaction, but as long as energy flows from the Gulf to the rest of the world are not severely disrupted the impact should be temporary.

Inflation continues to slow down across major economies, see our Global Inflation Watch - Underlying inflation continues to cool gradually, 10 October. The US September CPI signalled headline inflation slowing further in annual terms, while core inflation remained steady. On a monthly level, prices rose slightly more than we had anticipated, but the upside surprise was mostly linked to food and goods prices, which rarely drive persistent inflation. In any case, the resilience in US macro data reduces the chance of the Fed resuming 50bp rate cuts, and short-term rate dynamics favour a lower EUR/USD.

China was an exception to the positive market mood this week, as investors were disappointed with the lack of details on fiscal stimulus measures. China came out with a big monetary stimulus package two weeks ago, and ever since investors have been hungry for details on the fiscal side. This week, the National Development and Reform Commission gave a briefing which lacked concrete measures, leading to a big sell-off in the Chinese equity market. Next, all eyes are on a Finance Ministry briefing on Saturday. We expect Finance Minister Lan Fo'An to announce a clear stimulus plan, but market expectations have become very high, so there is room for disappointment.

Next week's main event will be the ECB meeting on Thursday. Final September HICP data will be released just a few hours before the rate decision, but it is unlikely to be a gamechanger. We expect the ECB to cut the policy rates again by 25bp which would bring the deposit rate to 3.25%, and markets agree with our view. Focus will again be on Lagarde's remarks and especially the Q&A session. Even if ECB's forward guidance has been non-existent, markets seem convinced that rates will be cut at a relatively steady pace from here. We expect another 25bp cut in December and quarterly cuts next year, and see risks tilted towards even lower rates if euro area growth disappoints.

The next days are busy with Chinese data. On Sunday, China will release CPI for September, but as the data is backward-looking, and given the recent focus on stimulus signals, markets will likely put less emphasis on the numbers. On Monday, China will release trade data for September. Export growth has been trending lower lately as global manufacturing activity has declined. The Chinese data week will be rounded off with a batch of key macro releases (Q3 GDP, retail sales, industrial production) on Friday.

Otherwise, next week's data calendar is very light with German ZEW due on Tuesday and US retail sales out on Thursday.

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