ECB Firmly on Hold

Market movers today

In Sweden, retail sales data for September will be released at 8.00 CET and it is possible that we will see a small decline m/m after five months of consecutive increases. This as consumer confidence declined slightly in September (but recovered during October) and the e-commerce indicator from the Swedish Trade Federation also showed weakness in September. Otherwise focus will be on the Riksbank’s business survey published at 9.30 CET. The report was highlighted in the minutes from September as an important input ahead of the Riksbank’s November meeting, where especially Aino Bunge stressed that she will look for comments on price setting behaviours.

Following yesterday’s ECB meeting, the ECB’s survey of professional forecasters is due today, read more about our take on ECB here: Flash ECB Review: Not rocking the boat, 26 October.

In the US, the University of Michigan survey will be released.

After Israeli army raid into Gaza, we will continue to monitor any developments in the conflict over the weekend.

The 60 second overview

ECB. As expected, ECB kept policy rates unchanged at yesterday’s meeting and guided that they are done with additional rate hikes. Lagarde seemed to be on a mission not to rock the boat in terms of market pricing, she succeeded well and gave indications that this was a stock taking meeting only. Lagarde highlighted uncertainty about the economic outlook and remained confident that inflation would return to the target if rates were maintained for a sufficiently long duration at the current level, based on today’s inflation. Surprisingly, no discussion took place on advancing the full end to PEPP reinvestments. The outcome was marginally to the dovish side of expectations and led to a minor dovish market reaction to the ECB decision and the press conference, which was supported by US data release along the way. Markets are pricing the first full rate cut in June next year. For more details, see Flash ECB Review: Not rocking the boat , 26 October.

Japan. Overnight, October inflation in Japan surprised to the upside when looking at both the headline and core inflation. Headline increased from 2.8% y/y to 3.3% y/y, while core (which excludes fresh food) rose to 2.7% (up from 2.5%). When excluding for both fresh food and energy inflation slowed to 3.8% from a revised 3.9% in September. The Bank of Japan meets on Tuesday, where we believe that further tweaks to the YCC may occur, but we anticipate that the negative short-term policy rate will not be abandoned until Q2 next year. We maintain a bearish view on USD/JPY, primarily due to our belief that there are limited upward risks to US yields from this point.

US. US Q3 GDP data surprised to the topside yesterday with Flash GDP at 4.9% Q/Q AR (Consensus 4.3%, Q2 2.1%). Inflation development was positive though, with core PCE inflation slightly below expectations at 2.4% on Q3 as a whole (consensus 2.5%). Private consumption remained strong, real consumption volume grew 0.98% q/q, driven especially by services, and accounting for the majority of the growth. Public investments also continued to grow strongly, supported by past infrastructure stimulus measures. Private sector structures investment boom cools clearly after a strong H1. Although inventories contributed by +1.3 percentage points to the GDP figure, the US economy and especially the American consumer remains on a solid footing.

Equities: The combination of solid earnings, strong macro numbers and a slightly dovish ECB was not enough to lift equities. That being said, most of yesterday’s drop was already in the future and hence it is fair to say that what we learned yesterday was not really negative for equities. We saw a slightly defensive rotation but it was very much linked to earnings reporting and to a lesser extent to macro and monetary policy. In US Dow -0.8%, S&P 500 -1.2%, Nasdaq -1.8% and Russell 2000 +0.3%. After hour earnings came out strong and we see Asian markets higher this morning together with both US and European futures.

FI: Yesterday’s slightly dovish market reaction was in line with the average market reaction on an ECB meeting day this year. 10y German Bund yields ended 3bp lower, supported by Lagarde saying that PEPP reinvestments were not discussed as well as below consensus US PCE. Lagarde conveyed that the meeting was mainly a stock taking meeting with no new policy signals for imminent changes, but sent a message that current rate level will contribute to inflation getting back to target. In this light, today’s SPF release is unlikely to be a market mover.

FX: EUR/USD was largely unaffected by the ECB decision and the stronger-than-expected US Q3 GDP growth, trading in the mid 1.0500-1.0600 range. USD/JPY remains slightly above potential intervention levels, comfortably above 150. EUR/GBP slightly declined towards the 0.87 mark. Scandies have somewhat stabilised, with EUR/NOK above 11.80 and EUR/SEK slightly below 11.80.

Credit: In spite of the dovish tilt in communication from the ECB yesterday which only left the long rates marginally lower, the credit markets remained negative with iTraxx main being wider by 2.1bp and Xover wider by 8.5bp. Both indices widening to 89.4bp and 470.7bp, respectively.

Danske Bank
Danske Bank
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