The US midterm elections delivered a significant surprise for the Democratic Party, which secured a solid majority in both chambers of Congress. The oil price declined significantly after the election as markets repriced the outlook for the war in Iran. Republicans blamed the high oil price for their defeat, a Democratic Congress could potentially constrain military funding for the war, and Trump announced no immediate plans for new strikes. Against this backdrop, the Brent crude price slipped to 98 USD/bbl from 113 USD/bbl one week ago. The deadlock in American politics means that US fiscal policy will be more predictable over the coming years, as Republicans have no chance of passing further deficit-widening measures. Rates declined especially in the short end and there was a significant rotation within equities where the consumer segment rose while IT declined. Semiconductor stocks plunged after a number of Democrats who pledged to crack down on data centre construction won gubernatorial elections in key states such as Texas, Georgia, and Ohio. With US macro data generally solid and the planning and approval process for data centre construction taking a long time, we do not expect these election results to affect the short-term growth outlook, but it is a longer-term risk for the datacentre buildout.
The October PMI and ISM surveys point to continued strong activity in the US economy. The ISM manufacturing index rose to 55.5 from 54.5, while the PMI index declined to 54.9. The ISM non-manufacturing index fell to 53.8 but still suggested a solid expansion in business activity. In China, the picture was more mixed as the official manufacturing PMI fell back into contraction at 49.3, while the private RatingDog Manufacturing PMI remained in expansion at 52.0. The large share of export companies in the private survey is likely behind the divergence. This suggests that China’s two-speed economy persists, with strong exports and weak domestic demand.
In the euro area, headline inflation rose to 4.0% y/y in October from 3.8% y/y in September, slightly above expectations due to a surprise in Italy. The uptick was driven by energy prices, while core inflation was unchanged at 2.5% y/y amid broadly stable momentum. Since the start of the war in Iran, core goods inflation momentum has picked up somewhat but remains low, while services inflation momentum has been stable. The October reading thus paints the same picture as in recent months of inflation mainly being driven by energy, with limited spillovers to broader inflation categories.
The Bank of England increased its key policy rate to 4.00% from 3.75%, as expected. However, it delivered a hawkish surprise to markets as all members voted for hiking, with one member even voting for a 50bp hike, and inflation projections were revised sharply higher. For details, see Bank of England Review – Hawkish surprise: 8-1 vote, Mann backed 50bp to 4.25%, 5 November.
In the next week focus turns to the US October inflation report, Chinese inflation, UK GDP and euro area employment data. We expect US CPI rose 0.3% m/m s.a. and core CPI rose 0.3% m/m s.a.
