Sunset Market Commentary

Markets

The record rally on stock markets is once again name of the game today as US president Trump continues his Asian tour. He made a deal with South Korean president Lee where $150bn in shipbuilding investment and another $200bn earmarked for other investments amongst others are matched by the US capping tariff goods at 15%. Ahead of the European bell, more bilateral commitments between the US and China had already been announced including lower fentanyl-related tariffs and the first Chinese bulk buying of soybeans this season. We approach the big moment with the planned 3-hour meeting between presidents Trump and Xi Jinping at 3am CET (tonight) after which Trump takes the Air Force One back home following a busy Asian tour. Also in the US/China-mix: the export of Nvidia chips. The company rallies to a record-breaking $5tn valuation today and lifts AI spirits in the run-up to Q3 earnings releases starting tonight with Alphabet, Meta and Microsoft. The Nasdaq currently adds 0.66%, making it a weekly gain of more than 5%.

A second “risk management” 25 bps rate cut by the Fed is all but certain tonight. For now, the narrative stands that downside employment risks are building faster than upside inflation risks. Lack of US eco data might mean lack of Fed guidance for December and could temper the market reaction. We don’t expect Powell to actively push back against markets pricing an additional move in December though. The end to QT could steal the rate cut’s thunder instead. Powell announced it two weeks ago at the NABE conference amid commercial bank reserves at the central bank dwindling to below $3tn. That’s less than 10% of GDP Fed Waller suggested as a minimum some years ago. That ballpark figure was based on the liquidity squeeze in 2019 which saw a spike in the short-term SOFR interbank rate. The level of bank reserves back then had dropped below 8% of GDP. The SOFR (and other general collateral rates for that matter) in recent days climbed back above the Fed’s upper bound rate again. Apart from this week’s huge t-bill supply, it potentially suggests that we’re moving from a situation of abundant liquidity to an ample one. We expect the chair to be queried about it. The current roll-off cap for Treasuries stands at $5bn per month, a limited amount anyway. MBS’s are capped at $35bn but the monthly amount in practice is often lower.

Sterling suffers more losses after yesterday’s technical break beyond EUR/GBP 0.8768/69. Apart from rising BoE rate cut bets, there’s the approaching 2026 Budget deadline (one month away). Today, UK PM Starmer refused to rule out raising income tax, national insurance or VAT hinting at a break of the election manifesto promises which could significantly weigh on UK growth.

News & Views

The Bank of Canada lowered its policy rate to 2.25% from 2.5%. Today’s decision comes with the resumption of baseline growth and inflation forecasts instead of a scenario analysis. GDP should grow by 1.2% this year, followed by 1.1% and 1.6% in 2026 and 2027. The BoC expects a weak 2025H2 to be followed by a recovery from next year on. Canada’s labour market is considered soft with job losses building in trade-sensitive sectors and weak hiring elsewhere. Inflation was 2.4% in September, slightly higher than the BoC had anticipated. Its preferred measures of core inflation had been sticky around 3% but alternative gauges suggested underlying inflation remains around 2.5%. Inflationary pressures should ease in the months ahead, allowing CPI to remain near 2% over the policy horizon. The current policy rate level is said to be “about the right level to keep inflation close to 2% while helping the economy”, suggesting a pause or perhaps the end to the easing cycle, provided the BoC’s forecasts more or less materialize. That’s supporting Canadian swap yields (+3.6-5 bps) and the Canadian dollar. USD/CAD drops to 1.39.

Swedish GDP grew a consensus-smashing 1.1% q/q in Q3 of this year. The accompanying monthly series showed the dynamic easing towards the end of the quarter with September GDP falling marginally by 0.1% m/m. But that comes after a huge boost in August (+1.2% m/m) and doesn’t change the notion of Sweden’s economic recovery finally taking hold. GDP since September 2022 never grew faster than 0.2% and even declined in five out of the 12 quarters. The annual print improved from 0.9% to 2.4%, the best outcome in three years. The numbers should comfort the Riksbank. The central bank last month cut the policy rate to 1.75%. It referred to growth being weak “for a long time” and had to push forward the timing of a recovery multiple times. It wasn’t planning on cutting rates much (if any) further though and today’s release adds to that conviction. The SEK strengthens to EUR/SEK 10.89.