Weekly focus – Trade tensions move to the background again

Trade tensions between the US and China eased this week following an agreement by Trump and Xi on several trade issues. The US side agreed to reduce fentanyl related tariffs on China from 20% to 10% and postponed probes into Chinese shipbuilding and compliance with the Phase One agreement. In return, China delayed export control on rare earth minerals by a at least one year and resumed soybean purchases from the US. It is positive that the two sides can de-escalate tensions, but we expect to see more bumps on the road, although the two sides will most likely try not to rock the boat ahead of Trump's China visit in April. For details, see: US-China trade - Xi and Trump put a lid on trade tensions once again, 30 October.

We had a busy central bank week where the US Federal Reserve cut interest rates by 25bp to a target range of 3.75%-4.0%. The cut was widely expected but Powell delivered hawkish remarks at the press conference, casting doubt on a December rate cut, and one member surprisingly voted in favour of holding rates steady. Powell said that 'another rate cut in December is far from assured' and that 'there is a growing chorus of feeling we should maybe wait a cycle'. He highlighted that despite the government shutdown, available data does not signal significant further cooling in labour markets. The Fed also announced an end to QT, for which markets were well prepared. For details, see Research US: Fed review: Hawkish cut, 29 October. In Japan, the Bank of Japan (BoJ) kept rates unchanged in a 7-2 vote. A small probability of a hike was priced prior to the meeting, leading to a further yen weakening. We maintain a hawkish BoJ outlook, expecting the next hike in December, contingent on improving wage and spending data.

In Europe, the ECB decided to leave its key policy rates unchanged with the deposit facility rate at 2.00% as expected. Lagarde highlighted that some downside risk factors have abated since the last meeting and stressed the symmetry of the 2% inflation target, which allows some undershooting. Otherwise, she gave limited new information, which resulted in no market reaction. Markets are pricing 1bp worth of cuts this year and 8 next year, while we expect the ECB to leave the deposit rate unchanged. See ECB Review: Abated downside growth risks, 30 October. Euro area HICP inflation declined to 2.1% y/y in October as expected by consensus. Core inflation surprised on the topside by holding steady at 2.4% y/y (cons: 2.3% y/y). The decline in headline inflation was thus due to lower food and energy inflation while services inflation rose to 3.4% y/y from 3.2% y/y. The monthly price increase in services was strong at 0.40% m/m s.a., which is slightly hawkish. We expect euro area inflation to average 2.1% in the final quarter of the year before falling below target next year. We also got data on euro area GDP in the third quarter, which showed that activity rose more than expected by 0.2 % q/q (cons: 0.1% q/q) following a rise of 0.1% q/q in the second quarter. The main surprise was the French economy that recorded a growth rate of 0.5% q/q due to strong exports while Germany stagnated, and Spain rose 0.6% q/q due to strong domestic demand.

Next week focus turns to private data from the US with the ISM report for October and ADP employment, the Challenger Report, and Uni. of Michigan consumer confidence. In China, we get the private manufacturing PMI which is interesting following a big decline this week in the official version. In Japan focus turns to wage growth, while there is limited data in the euro area. Finally, we expect a 25bp cut from the Bank of England to 3.75%.

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