In focus today
In the euro area, focus tuns to the August retail sales data and the October Sentix confidence indicator. The consumers have been cautious recently and retail sales will show if that persisted in August. It is expected that spending rose 1.3% y/y (0.1% m/m). The Sentix investor confidence indicator is expected to show an improvement to -7.7 from -9.2.
This week features a light calendar with no tier-1 global macro data scheduled. However, the delayed US labour market report could be released if the government shutdown ends. Key events include the University of Michigan consumer confidence survey and FOMC minutes in the US, and wage figures from Japan.
Economic and market news
What happened since Friday
In Japan, Saturday, the governing Liberal Democratic Party (LDP) chose a new president who is also likely to become the new PM. In her third attempt on the presidency, Abenomics loyalist Sanae Takaichi was elected as party leader against polls, which had continuity candidate Shinjiru Koizumi as favourite. Takaichi stands for a bigger fiscal package than other candidates and will not rule out lowering the VAT-rate, a move popular among opposition parties. She will now try to form a coalition in the lower house to become the first female PM In Japan. As a nationalist and advocate for amending Japan’s pacifist constitution, continuing the current alliance with the small Buddhist party, Komeito, might not be straight forward, and thus political uncertainty lingers. A snap election also cannot be completely ruled out, even if that exact move backfired for the LDP last year. Takaichi has previously been critical of BoJ hikes, which is also reflected in BoJ pricing and yen weakness this morning. Investors now only see about 25% chance of an October hike and USD/JPY is back at 150, up from 147.5. With high inflation and a weak yen as bigger political issues these days, we do not think she will stand in the way of higher interest rates, but normalising BoJ policies might take even longer with Takaichi as PM.
In the US, the ISM report on the non-manufacturing sector for September revealed a PMI of 50.0 (cons: 51.7, prior: 52.09 The data highlights weakening momentum in services, with declines in business activity and new orders. Meanwhile, the prices index remains sharply elevated at 69.4 (prior: 69.2). The employment index showed a slight recovery to 47.2 (prior: 46.5), although it’s worth noting this metric has historically shown limited correlation with monthly NFP data.
In Norway, the SA unemployment rate remained steady at 2.1% in September, as expected. While the number of unemployed persons dropped by 3-400 m/m, total unemployment (all types) rose by 100 persons, presenting mixed signals. New vacancies increased to 40 200, with the 3-month moving average at 42 400, indicating a renewed pick up in labour demand. The Norwegian housing market continues to look robust with house prices rising 0.4% m/m, taking the annual growth to 5.5%. Although price growth came in slightly below Norges Bank’s forecast of 0.6%, the impact is insufficient to influence monetary policy.
In Sweden, the services PMI surged in September, rising from 53.8 to 57.7, pushing the composite PMI up from 54.2 to 57.1. A strong services PMI, with a notable recovery in the employment index, signals potential upside risks to employment. The indicator is not the most reliable, but it still offers an encouraging sign. The composite PMI also indicates some upside risks to our GDP-forecast and suggests that the recovery will pick up speed before year-end. Price pressures remain contained.
In commodities space, OPEC+ agreed to increase oil output by 137,000 barrels per day in November – a modest hike despite speculation of faster increases. While the market might be relieved, we think the big picture in the oil market is more important. OPEC+ continues to increase supply amid low prices, greatly limiting upside potential for oil prices.
In the Israel-Palestine conflict, Hamas has accepted key elements of Trump’s 20-point Gaza peace plan, including a ceasefire and Israel’s initial withdrawal. However, critical issues, such as Hamas’s willingness to disarm, remain unresolved. High-stakes talks between delegates from Hamas, Israel, the US, and Qatar are set to take place in Egypt today to finalise the plan’s implementation.
Equities: Equities ended last week higher again, marking yet another strong stretch of performance and fresh record highs across major indices. The key challenge for equities right now is simply the pace of the rally, markets are increasingly running ahead of fundamentals.
Healthcare was the standout sector last week, with the pharma industry surging more than 10% in both Europe and the US. It’s a textbook example of what can happen when a deeply oversold and under owned sector finally gets a hint of positive news flow. This sharp turnaround also vindicates our earlier decision to move from neutral to overweight in healthcare. In contrast, energy lagged significantly as oil prices extended their decline, leading to substantial sector dispersion. Despite five consecutive up-days for global equities, defensives outperformed, largely due to healthcare’s strength. Interestingly, volatility crept slightly higher through the week, with the VIX rising modestly each day despite the equity gains. The US government shutdown narrative and lack of key data likely contributed to the mild uptick in implied volatility.
This morning, Japanese equities are up more than 4% as markets react to news of a new prime minister, reviving memories of Abenomics-style policy shifts. Futures are also pointing higher in both Europe and the US.
FI and FX: Despite a relatively calm end to last week in the fixed income and FX markets and despite the fact that Israel and Hamas are set to begin negotiations today, gold prices continue to climb, reaching new highs.
In Japan, the election of Sanae Takaichi triggered an equity rally, while the JPY weakened further. Meanwhile, in the US, attention remains on the duration of the government shutdown and its economic implications, particularly given the postponement of key data releases. The Fed’s response to these developments remains a critical focus for markets.
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