Markets
The October Empire Manufacturing Business Survey is one of those sole data points we get from the US with the government shutdown interfering with most of the data releases since the start of the month. The NY manufacturing index from the NY Fed unexpectedly reversed last month steep drop, rising back from -8.7 in September to 10.4 (11.9 in August). Details showed improvements across the board, both for the actual subindex and the one projecting sentiment 6 months ahead and both on the activity (eg new orders, shipments, but also employment) and the price front (paid & received). The outlook for prices paid approached the highest levels since 2022. The notoriously volatile Empire Manufacturing Survey didn’t impact trading though. At the margin, it helped US yields away from key support areas (eg US 2-yr 3.46% and 10-yr 4%). In this respect, it’s striking that yesterday’s Fed Powell speech didn’t have any more impact. He sealed the deal for October (25 bps rate cut) as downside employment risks rise faster than upside inflation risks and simultaneously called an end to the quantitative tightening cycle in coming months. Tonight, the Fed still releases its Beige Book, a summary of regional economic conditions which serves as a preparatory document for the FOMC meeting and is often overlooked. This time around, it could obviously grab some more attention though its hard to impact market pricing. The euro tried to build on yesterday’s intraday comeback but the move didn’t reach far. EMU bond markets fall back on the dovish reflex which dominated the period between US Liberation Day and the EU/US trade deal. They start erring more significantly in the direction of another ECB rate cut over the next 12 months. Daily changes on the German yield curve range between 2.2 bps (2-yr) and 4.4 bps (30-yr). France meanwhile remains stuck between a rock (budgetary crisis) and a hard place (legislative elections) as PM Lecornu tries to win confidence votes tomorrow. Despite support from leadership of French Socialists and Republicans, it remains to be seen whether they can rally all of their MP’s behind the party line. The margin for error is thin. Markets take the optimistic approach today with French assets outperforming. The CAC40 rebounds 2.1% with strong company earnings helping out as well. The EuroStoxx 50 currently recovers 1.15% with key US indices opening with 0.6%-0.9% gains. The 10-yr OAT-swapspread narrowed from 84 bps yesterday morning to currently 77 bps.
News & Views
The Norwegian (minority) government today published a draft budget for next year. The budget from the Labour government needs approval from smaller parties, which currently hold some non-addressed demands. The draft foresees NOK 579bn of the spending to be covered by funds of the Government Pension Fund Global (GPFG). This represents 2.8% of the value of the fund (capped at 3%) and represents about 27% of the budget expenditure. The government believes that 2026 fiscal policy will have an approximately neutral effect on the economy. Amongst others, the draft proposes NOK 4bn in income tax cuts and a NOK 11.5bn allocation to electricity support. The budget is estimated to raise defense spending to 3.4% of GDP. Government projections expect the mainland economy to grow by 2.1% next year from 2% this year. CPI-ATE inflation is expected to ease to 2.5% next year from 2.9% this year. At the its September 17 meeting the Norges bank cut the policy rate to 4% from 4.25%, but indicated that further easing might develop slower as the economy is holding relatively resilient. With respect to fiscal policy, the NB in September also assessed the structural non-oil public deficit at 2.7% this year and 2.8% next year. The krone today rebounds from EUR/NOK 11.79 to 11.715 today, but this is mainly due to a better risk overall sentiment.
In an interview with Bloomberg TV, the chief economist of the Reserve Bank of New Zealand, Paul Conway, indicated that after reducing the official cash interest rate by 50 bps to 2.5% the policy rate now is at the lower end of the neutral range. The RBNZ is still prepared to further cuts if data warrant so. According to Conway, the 0.9% Q/Q contraction in Q2 raised the possibility of a more prolonged period of excess capacity in the NZ economy and might cause less medium term inflation pressures. The RBNZ wanted to reacted to that, even as inflation currently still holds near the top of the RBNZ’s 1-3% target range. It is confident that this relatively high inflation will dissipate. NZD gains about 2.3% YTD against USD, but this places it as the laggard compared to G10 peers.
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