In focus today
In Norway, the fiscal budget for 2026 is published, where we expect a slightly expansionary effect, with an oil-adjusted deficit around 2.8% of the Petroleum Fund. This would be in line with Norges Bank’s assumption from the monetary policy report in September and should therefore be neutral for monetary policy outlook. Remember that Norway has a minority government and is dependent on four other parties to get the budget through Parliament.
In Sweden, the details for September inflation will be published today. The preliminary outcome showed CPIF excluding energy at 2.70%, CPIF at 3.09%, and CPI at 0.89% for September. The preliminary outcome was in line with our forecast and close to the Riksbank’s forecast.
Economic and market news
What happened overnight
In China, consumer prices fell 0.3% y/y in September (cons: -0.2%, prior: -0.4%) amidst weak demand, with food prices seeing their sharpest contraction since January 2024, while core inflation rose to a 19-month high of 1.0% y/y. Producer prices dropped 2.3% y/y, the mildest decline since February, reflecting Beijing’s efforts to curb excess capacity. Easing declines in mining and raw materials supported the result, while consumer goods prices remained weak.
What happened yesterday
In France, Prime Minister Lecornu presented the draft budget for 2026 and announced a suspension of the 2023 pension reform until the presidential elections in 2027. Suspending the pension reform was a key demand from the Socialists to ensure the government’s survival in the two no-confidence votes scheduled tomorrow. The Socialists’ leader said that the party would not vote to oust the government, which significantly increases the chances that Lecornu survives. The yield spread against Germany narrowed by three basis points to 80, reflecting increased optimism about the government’s stability, the likelihood of reaching a 2026 budget, and avoiding snap elections. The draft budget proposed a EUR 30bn deficit reduction next year to 4.7% of GDP. However, the final deficit is expected to be closer to 5% of GDP, as Lecornu stated he would secure parliamentary approval with a majority rather than resorting to article 49.3. While we see these developments as positive in the short term, a complete reversal of the pension reform would place additional strain on France’s already weak public finances, which rating agencies would see as negative. The suspension is projected to cost EUR 400m in 2025 and EUR 1.7bn in 2026, while a permanent suspension by 2030 potentially costing EUR 13.5bn.
In Germany, investor confidence in October came in weaker than expected according to the ZEW survey. The assessment of the current economic situation fell to -80.0 (cons: -74.2) from -76.4, while expectations rose to 39.3 (cons: 41.1) from 37.3. The large decline in the current situation suggests that the German economy is still broadly stagnating, meaning that fiscal easing is needed to drive growth as private demand cannot do it alone now. Hence, we expect the German to continue stagnating until early next year when fiscal easing kicks in.
In the US, NFIB offered some interesting details on how small businesses see the outlook, while we wait for the official US data. Optimism declined as the index fell from 100.8 in August to 98.8 in September, even though hiring and capex plans remained mostly steady. Instead, tariff-related issues were a rising concern, with 64% of respondents saying supply chain disruptions were affecting their businesses (Aug. 54%). Inventory satisfaction declined sharply, and price plans edged higher. It is worth noting as this has historically led changes in the official CPI by few months.
In a dovish statement, Fed Chair Powell noted that although that the economy might be on firmer footing than expected, the labour market remains weak and “downside risks to employment have increased”. Powell confirmed the Fed’s meeting-by-meeting approach to rate decisions, balancing above-target inflation with job market concerns. He highlighted that tariffs, rather than broader pressures, are driving elevated goods prices. Markets took his speech as a signal that he could be ready to support an interest rate cut in October. Our call aligns with markets in expecting a 25bp rate cut at the upcoming meeting.
President Trump announced he is considering terminating certain trade ties with China, including cooking oil imports, as a response to reduced US soybean purchases by China. The move highlights escalating trade tensions, with Washington and Beijing already at odds over tariffs, supply chains, and broader geopolitical issues.
In the ECB, despite the lack of tier 1 data, there has recently been a slight dovish twist from key ECB members with Villeroy (dovish, voter at the upcoming meeting) noting that he sees “more downside than upside inflation risks” and that “the next rate move more likely cut than hike”. This underscores the dovish tone from the September minutes, which highlighted that several members view inflation risks as tilted to the downside and that “a further rate cut in the coming months would better protect the inflation target both under the baseline and across a range of adverse scenarios, the materialization of upside risks would instead warrant maintaining the current level of the policy rate”. Our call is that the ECB is done cutting interest rates, but we do recon the downside risks of a cut in December or one of the following meetings, although it is not our base case.
In the UK, data came in on the weak side of expectations yesterday with particularly the unemployment rate edging higher to 4.8% and private sector wage growth declining to 4.4 % 3M/YoY from 4.7%. At the same time, retail sales eased significantly from 2.9% in August to 2.0% in September, as consumers are bracing for tax increases in the upcoming November budget. The data was not all dire though, with job loss at a modest 10K in September and a revision for less steep payroll decline over recent months. In sum, data to the weak side keeps the chance of a November BoE rate cut alive, even if one of the following meetings is starting to look more likely. BoE governor Bailey also expressed concern about the jobs market in a public appearance yesterday.
Equities: Equities were mixed yesterday in a quite volatile session following Monday’s bounce. Markets were highly sensitive to Trump news, with a slightly confrontational Truth Social post tempering risk appetite. S&P 500 declined -0.2% while Stoxx 600 was -0.4% lower. In the US, breadth was positive with 1pp performance difference between market cap- and equal weighted and value cyclicals topped AI/growth. In Europe, it was a bit of the reverse with lower long end yields triggering buying in real estate. Futures are higher this morning, primarily in Europe.
FI and FX: Yesterday, the Federal Reserve Chairman Powell indicated that the Federal Reserve would lower rates at the meeting on 29 October given the weakness in the labour market. This is fully priced by the market as well as the second rate cut in December. Powell also hinted that they may slow the balance sheet reduction in coming months to maintain liquidity in the short-term money market. This sent bond yields modestly lower, and the curve steepened. This has continued in Asian trading this morning.
There was also a bullish sentiment in the European fixed income market yesterday, but the curves flattened, and spreads tightened between France and Germany as the French PM propose suspending the pension reform law and won support for his plan from the Socialist opposition such that he may survive the vote of confidence expected on Thursday.
