In focus today
Several key indicators for the US economy are set to be released in the afternoon. This includes the PPI, retail sales and the consumer confidence indicator. Note that the PPI and retail sales are part of the delayed September releases. With few other data prints are on the agenda, the market reaction could be larger than usual and may very well affect sentiment surrounding the FOMC December meeting.
Economic and market news
What happened overnight
In the Ukraine war, the US and Ukraine drafted a 19-point peace deal with the remaining elements to be discussed by President Trump and President Zelenskiy. The remainders include territorial concessions and NATO relations. The Ukrainian delegation said that the next steps include presenting the plan to both Presidents and the White House approaching Moscow with the deal.
What happened yesterday
In the US, Fed governor Waller said he would support the central bank cutting rates in December, citing the weak job market. He also added that any further action would depend on the delayed US data releases. The market is currently pricing the odds of a December interest rate cut about 70%.
In Germany, the Ifo Business Climate index for November declined to 88.1 (cons: 88.5) from 88.4. The assessment of the current situation rose marginally to 85.6 as expected (cons: 85.5) from 85.3. The expectations index was behind the decline, unexpectedly declining to 90.6 (cons: 91.6) from 91.6. The current situation remains stable around the average level of the past year. Despite this month’s decline, expectations are markedly higher than last year. The German economy has yet to recover but expectations for a recovery remain intact. We will likely have to await the effects of fiscal easing before the economy records a rebound in activity.
Equities: Global equities rebounded for a second consecutive day. The US market led the way, with the S&P 500 rising 1.7%. Unlike Friday’s session – which was a selective rotation in all areas but growth and momentum stocks – Monday’s rebound was about buying the dip in US tech. Outside US tech most sectors were flat or even lower, signalling a rotation out of staples and energy and back into AI-related names (tech outperformed staples by 4 percentage points yesterday). To give a sense of the magnitude, Alphabet, Broadcom and Tesla rallied between 7-11%.
The 2% gain in the S&P 500 contrasts to lukewarm 0.3% return in European equities on Monday. Not to mention Danish equities that fell 2% after Novo Nordisk failed to demonstrate a statistically significant reduction in Alzheimer’s disease progression. The key point is that while an “AI capex hangover” is the most common and logical explanation for the recent pullback, European- and Nordic equities have now sold off more from their peak than US markets, despite a far smaller AI exposure. This either argues for a catch-up in the coming days or suggests that the selloff has also been driven by factors beyond AI scepticism.
FI and FX: While it is clearly a strong divide between the doves and the hawks in the Fed board as revealed by the dots, by Powell’s words at the press conference, his pushback against the then-almost-fully-priced December cut, and recent Fed speeches, the market has taken its cue from the dovish camp. As such, US rates edge lower, the Fed is being re-priced (again) and the December contract now trades at -19bp, while equities and therein particularly the tech sector rally. Yesterday, S&P 500 closed at +1.6% and Nasdaq at +2.7%. Interestingly, the positive sentiment has not had much impact on FX this week. EUR/USD is roughly stable just above 1.15 while EUR/SEK and EUR/NOK are stuck around 11.00 and 11.80.
