Sunset Market Commentary

Markets

Euro area PMIs for October were on tap and came in to the strong side of expectations. Economy-wide activity picked up to 52.2 from 51.2, a 17-month high, driven by the services sector (52.6 from 51.3) on a steeper increase in new orders and employment. Germany in particular printed a sharp increase in services activity (54.5 from 51.5). Manufacturing output quickened to a 2-month high of 51.1 and with order books stabilizing after September’s drop it helped the total manufacturing index climb out of contraction territory. Exports remains a weak point but backlogs stabilized, thereby ending a period of depleting stretching back to April 2023. Input cost inflation eased again but manufacturers increased their selling (output) prices for the first time in six months, joining the services sector. Firms remain cautious on the outlook though. France stands out in virtually every (sub)series, and not in a good way. The PMI owners say economic growth in the euro area is currently much weaker than it could have been because of the French drama. Either way, the overall takeaway is an across-the-board solid beat. It lifted European yields to their highest levels in two weeks (+/- 5 bps), both at the front and long end of the curve before dropping from their intraday highs in the wake of US inflation numbers printing a tad below expectations. Headline US CPI rose by 0.3% m/m, core by 0.2%, resulting in a 3% annual reading. Energy was a main contributor (+1.5% m/m). Apparel & household furnishings, one of the categories watched for tariff-related inflationary effects, rose 0.7% and 0.5% respectively. The market reaction is telling: the 2-yr yield dropped up to 7 bps before paring most of the losses. Money markets at some point were even mulling the possibility of the Fed going big at one of the remaining two meetings this year. That seems farfetched based on this sole economic data point but its revealing of the markets’ mindset. Longer term US bond yields ease 1-2.5 bps. Enter the PMIs to wipe out all of the remaining CPI-driven losses. The US version followed the European and UK example by coming in better than expected. The services gauge picked up to 55.2, the manufacturing series to 52.2. The overall PMI (54.8) is this year’s second-highest reading. The strong start to Q4 (2.5% annualized growth) comes with weaker confidence for the year ahead though. Input cost inflation rose but output prices didn’t follow amid firms competing for sales. The flurry of eco data offers no clear guidance for EUR/USD, with the pair simply holding steady around 1.162.

Today’s PMIs and US inflation were mere appetizers going into next week’s main dish. The ongoing US government shutdown strips us from the durable goods orders, Q3 GDP and PCE inflation releases & jobless claims but we have the euro area to fill in some of the gaps. EA GDP and inflation numbers are due with releases scattered across the week. Key central banks decide over policy: the Fed (-25 bps expected to 3.75-4%) and the Bank of Canada (-25 bps to 2.25%) on Wednesday, and the BoJ (unchanged at 0.5%) and ECB (unchanged at 2%) on Thursday. The highly anticipated in-person meeting between presidents Trump and Xi will be closely watched for any signs of a trade thaw. The earnings season shifts into higher gear (Caterpillar, Alphabet, Meta, Microsoft, Apple, Amazon …).

News & Views

October Czech confidence data improved further. The composite indicator rose 2.1 points to 104, the best level since June 2021 on both improving business (up 1.8 to 103.4) and consumer confidence (+ 3.9 to 107.4). Confidence in the economy increased in industry and slightly in selected service sectors. It declined in trade and construction. The share of consumers expecting the overall economic situation to deteriorate over the next twelve months fell significantly compared to September. Households expecting their financial situation to improve over the same horizon also increased. The Czech koruna trades marginally softer today at EUR/CZK 24.33, but in a broader perspective holds a solid performance recorded earlier this year (YTD 3.5% gain).

UK PMIs showed somewhat faster UK output growth in October, with the composite PMI rising from 50.1 to 51.1. That corresponds to still-sluggish growth nonetheless (0.1%). The upturn was supported by another modest improvement in the services sector (51.1 from 50.8) and a first limited expansion in manufacturing output in 12 months. New business volumes also increased and contributed to the slowest rate of private sector job shedding since May. Input prices moderated to the lowest since November 2024 and output inflation slowed, driven by a more modest rise in service sector prices. The upcoming budget remains a source of caution in businesses’ behavior.