Market movers today
Focus remains on politics. Tomorrow, the US mid-term elections take place, where the most likely outcome seems to be a divided Congress. We do not expect the midterms to have big implications for growth and financial markets.
In Germany, focus is on who is going to succeed Angela Merkel as CDU leader, see German Politics Monitor, 5 November. In Italy, we have the ongoing budget clash with the EU. The trade war is back in the spotlight, as Trump seems slightly more willing to negotiate with China.
US ISM nonmanufacturing will give us more information about current growth momentum. In September, the index printed the second-highest value since the series began in 1997.
UK PMI service index is expected to fall slightly to 53.3. The Lloyds Business Barometer suggests a sharp fall is on the cards and the DG ECFIN service confidence indicator says it probably remained unchanged.
Selected market news
Optimism over a US-China trade deal quickly faded and risk markets have started off on a weak note after White House economic adviser Larry Kudlow downplayed the potential of a quick deal with China. We see a 60% probability of a ceasefire in the trade war, but any real deal will take time to reach and is unlikely to be done until some point in 2019.
On Friday, US equities ended the day lower following a strong US jobs report, showing that non-farm payrolls increased by 250K in October, while average hourly earnings increased 0.2% m/m, hinting that wage pressure is increasing but only gradually.
The US jobs report supports the case for further rate hikes from the Fed and yields on 10-year US treasuries increased 8bp to 3.22% on Friday. We expect the Fed to remain on autopilot and look for the next rate hike to arrive in December.
Brexit optimism has gained further after the Times reported that UK Prime Minister Theresa May has secured concessions from the EU that allow all of the UK to remain in a customs union with the EU and avoid a hard border in Northern Ireland. Brexit remains a key driver and source of volatility for GBP in the coming months ahead of a deal. May’s Brexit cabinet is scheduled to meet tomorrow to discuss it.
Late on Friday, MNI reported that some ECB official sources are considering fresh TLTROs, which also suggested the discussion will take place at the December meeting. It is likely to be an ongoing focus for markets as the one-year regulatory deadline approaches (summer 2019). It was mentioned by two ECB members at the meeting and it remains our baseline that another round of TLTROs will be launched, however, not in December.
