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BoJ kept its uncollateralized overnight call rate steady at approximately 0.25% in a unanimous decision, aligning with market expectations. The central bank indicated that if the outlook for economic activity and prices materializes as anticipated, it will "accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation." This signals readiness to tighten monetary policy further, contingent on economic developments.

Nevertheless, BoJ emphasized the necessity of paying close attention to the "future course of overseas economies," particularly the US, along with developments in financial and capital markets due to their impact on Japan's economic activity and price outlook.

In its latest economic projections, the BoJ made the following adjustments:

Real GDP Growth:

• Fiscal 2024: Unchanged at 0.6%.
• Fiscal 2025: Revised upward from 1.0% to 1.1%.
• Fiscal 2026: Unchanged at 1.0%.

CPI Core (excluding fresh food):

• Fiscal 2024: Unchanged at 2.5%.
• Fiscal 2025: Revised downward from 2.1% to 1.9%.
• Fiscal 2026: Unchanged at 1.9%.

CPI Core-Core (excluding fresh food and energy):

• Fiscal 2024: Increased from 1.9% to 2.0%.
• Fiscal 2025: Unchanged at 1.9%.
• Fiscal 2026: Unchanged at 2.1%.

Full BoJ Outlook for Economic Activity and Prices here.

Japan’s industrial production increased by 1.4% mom in September, exceeding expectations of 0.8%. This recovery follows a sharp -3.3% mom drop in August when a typhoon disrupted operations across various sectors.

Out of the 15 industrial sectors surveyed, 10, including motor vehicles and chemical production, recorded growth. Five sectors, such as production machinery, saw declines.

Despite this recovery, the Ministry of Economy, Trade and Industry maintained its cautious view, describing industrial production as “fluctuating indecisively.”

Looking ahead, manufacturers polled by the ministry expect a robust 8.3% mom increase in output for October, followed by a -3.7% mom decline in November, indicating ongoing volatility in Japan’s production.

Meanwhile, Japan’s retail sales rose by a modest 0.5% yoy in September, falling significantly short of the anticipated 2.3% yoy growth.

Australia’s retail sales turnover increased by a modest 0.1% mom in September, reaching AUD 36.46B but falling short of the expected 0.4% mom rise. This follows a 0.7% gain in August and a flat outcome in July.

Commenting on the data, Robert Ewing, Head of Business Statistics at ABS, noted that “retail spending held firm in September” following a boost in August from warmer-than-usual weather.

The report also highlighted quarterly retail sales volumes, which grew by 0.5% in Q3, marking a recovery after back-to-back declines of -0.4% in both Q2 and Q1.

Ewing added that this increase in volumes reflects “some of the lost ground in discretionary spending this year,” marking only the second quarterly rise in retail volumes over the past two years.

Full Australia retail sales release here.

New Zealand’s ANZ Business Confidence surged from 60.9 to 65.7 in October, marking its highest level in a decade and reflecting a wave of optimism among businesses.

This renewed confidence is supported by a range of positive indicators: the outlook for own activity increased slightly from 45.3 to 45.9, while export intentions jumped from 13.8 to 17.1, the highest since September 2018. Investment intentions also surged from 9.2, reaching 20.0, the highest level since June 2021, and employment intentions rose from 11.8 to 14.2, the highest since November 2021.

Several key metrics highlight this optimism. Cost expectations dropped from 66.8 to 64.2, indicating some relief in business expenses, while wage expectations edged up slightly from 76.4 to 77.0. Pricing intentions also rose, climbing from 42.8 to 44.2, suggesting businesses may feel confident in passing some costs to consumers. Profit expectations strengthened from 22.2 to 27.0, and inflation expectations continued their downward trend, dipping from 2.92% to 2.82%.

According to ANZ, "steady falls in interest rates" have provided a strong boost to business sentiment, encouraging growth across multiple sectors.

Full NZ ANZ business confidence release here.

Falling interest rates helped to lift business confidence further in October. Firms also reported a modest improvement in their current performance, and inflation indicators were mixed.

Key results (October 2024)

• Business confidence: 65.7 (Prev: 60.9)
• Expectations for own trading activity: 45.9 (Prev: 45.3)
• Activity vs same month one year ago: -10.5 (Prev: -18.5)
• Inflation expectations: 2.83% (Prev: 2.92%)
• Pricing intentions: 44.2 (Prev: 42.8)

General business sentiment rose 5 points in October to 65.7, setting another 10-year high. Firms’ expectations about their own prospects were up only slightly, though there were solid gains for the specific questions about expected hiring, investment and profits.

The surge in confidence in recent months has followed the Reserve Bank’s shift in stance – from warning about the need for interest rates to remain high for an extended period, to delivering 75bp of OCR cuts with the likelihood of more to come.

But while businesses are feeling more optimistic about the outlook for the year ahead, that’s still coming from a weak starting point. A net 10.5% of firms said that their activity was down compared to a year ago – a modest improvement from the net 18.5% in September.

The indicators of price pressures were mixed. Firms’ expectations for inflation in the year ahead ticked down from 2.9% to 2.8%. The September quarter CPI was released mid-October, so likely pre-dated many of the responses to this survey – we may see a more decisive move lower in this measure next month.

In contrast, firms’ own pricing intentions ticked up in October, as they have done for the last four months. That’s not obviously driven by cost pressures – firms’ cost expectations remain elevated compared to pre-Covid levels, but have been drifting lower. So perhaps firms believe that an improving economy will help to restore their pricing power which has been eroded in recent times. We’ll be keeping an eye on how this resolves.

Market picture

Polls and forecasts have yet to produce a clear frontrunner in the US presidential race. In recent days, there has been a widespread view that markets are pricing in a Trump victory, but for many investors it is too close to call, increasing the potential for movement when the results are announced.

Remember that in addition to the presidential election, there will also be votes for the Senate and the House of Representatives. The latest estimates suggest that the main candidates have an equal chance of winning. The Senate is expected to be controlled by the Republicans (69% chance), while the House of Representatives is expected to go to the Democrats (56% chance). The most significant impact on the markets would be the consolidation of power in the hands of one party, enabling it to implement its initiatives quickly. The expected outcome would force the president to compromise, which would take time, smoothing out the overall impact but not eliminating it.

If Harris wins

The arrival of Democrat Harris in the White House will maintain the status quo on key policies. This could be good news for alternative energy, as defences against Chinese competition are likely to increase. The arrival of the Democrats in 2020 has also been good for the Russell 2000 index, which has rushed to catch up with the rest of the market in anticipation of consumer stimulus. In the currency market, a rise in consumer spending could push the dollar lower. The Dollar Index would then move towards the 90-100 area from the current 104.3. Since 2008, the EURUSD has gained between 0.7% and 3.5% intraday on a Democratic victory. Gold has gained 2-5% intraday on a Democratic victory, but the dynamics have been mixed since then.

If Trump wins

Trump’s return to the White House is potentially good news for big business, as it could lead to new tax cuts and trade barriers with a wide range of trading partners, from nearby Canada and Mexico to the EU and China. That was roughly the outcome after 2018. Rapid implementation of his reforms could bring capital inflows to the US, ensuring that stock indices outperform. We should also expect increased traction for hydrocarbon companies, given the industry’s lobby among Republicans.

At the same time, this is potentially good news for the dollar, which added impressively in 2018-2020 as trade disputes have intensified. You can’t do without them with a new ex-president. The US currency could also benefit from a rising risk premium, which goes hand in hand with Trump’s heightened tone in meetings with colleagues and his frequent mood swings. The DXY could then return to its 2022 highs within a couple of years, 10% above current levels.

Gold rose 5% intraday on Trump’s election, only to erase the gains before the end of the day and lose 14% by the end of the year. In general, however, gold is more tied to monetary policy cycles than to individual presidents. Assuming higher inflation in the US under Trump, we should expect higher Fed rates and more pressure on the price of the ounce.

Whoever wins

Investors are increasingly focusing on the dynamics of the budget deficit. A couple of years ago, markets chastised the UK for announcing ‘unfunded’ tax cuts. The same could be happening in the US. We do not rule out the possibility that the persistent fall in bond prices (rising yields) and the pull on the dollar and gold since September are a manifestation of concern about this issue. The candidates are avoiding this uncomfortable topic but will surely return to it immediately after the victory speech. There is potential for volatility in the first few days after the election, as well as a commitment to the original campaign promises.

Stock indices tend to rally soon after an election, after a period of sluggishness in the weeks leading up to it. But it’s worth noting that in previous elections, equity indices have corrected more deeply and accelerated higher than we’ve seen now. A repeat of all-time highs is likely, but it’s hardly reasonable to expect 10% or 15% gains for the rest of the year after election day, as we saw in 2016 and 2020, or even 7%, as was the case in 2012.

• USDCAD reversed from strong resistance level 1.3940
• Likely to fall to support level 1.3875

USDCAD currency pair today reversed down from the strong resistance level 1.3940 (which stopped the previous intermediate impulse wave (1) at the start of August).

The downward reversal from the resistance level 1.3940 stopped the earlier impulse waves 3 and (3).

Given the strength of the resistance level 1.3940 and the strongly overbought daily Stochastic indicator, USDCAD currency pair be expected to fall further toward the next support level 1.3875.

• Brent crude oil reversed from long-term support level 70.00
•  Likely to rise to resistance level 75.00

Brent crude oil recently reversed up from the major long-term support level 70.00 (which has been reversing the price from the end of 2021).

The support zone near the support level 70.00 was strengthened by the lower daily and the weekly Bollinger Bands.

Given the strength of the support level 70.00 and the bullish divergence on the weekly Stochastic indicator, Brent crude oil can be expected to rise to the next resistance level 75.00.

Markets

With central banks in full data dependence mode, every eco figure counts. It makes trading more volatile from one policy meeting to the next. A disappointing September PMI survey and confirmation of the disinflation trend convinced the ECB into conducting back-to-back rate cuts in October and convinced markets that a 50 bps December rate cut could be in the cards. Today’s data show that the ECB was trigger-happy and that (EMU) money market better pare those acceleration wagers. We pointed out the discrepancy between soft EMU survey data and more robust hard data. Since the former are released in a more timely manner, they tend to grab most attention. For once it's the other way around. The gap between a PMI-prognoses flat quarterly growth figure and the effective 0.4% Q/Q print was even bigger than expected. On a national level, Spain stuck with its stellar 0.8 Q/Q growth, while both France (0.4%) and Germany (0.2%) beat consensus. Italy (0%) was the outlier with net exports working as a drag. GDP data helped EUR/USD together with national inflation prints to an intraday top of 1.0859, creating more breathing space around the 10778/61 support zone. Inflation is the second piece of the puzzle. The ECB knew in advance that base effects would lift headline inflation rapidly back above the 2% inflation target after a one-off lower in September. National numbers in Spain show a 0.6% M/M and 1.8% Y/Y increase with core PCI unexpectedly ticking up to 2.5% Y/Y. Belgian inflation rose by 0.5% M/M to 3.2% Y/Y. German inflation accelerated from 0% in September to 0.4% M/M in October (vs 0.2% expected) with the annual reading up at 2.4% Y/Y (from 1.8%). EMU numbers will be published tomorrow. Daily changes on the German yield curve range between +4.6 bps (2-yr) and -3.4 bps (30-yr) compared to yesterday evening’s close. However, we must add a significantly lower opening, copying the late swoon in US yields yesterday (related to Trump losing his 56-44 lead against Harris in election prediction models?). The US agenda was buzzing as well today. ADP employment change showed 233k net job growth in October, the most since July 2023, with a 15k upward revision for September and smashing 111k consensus. The US economy continued to grow at a solid pace in Q3 (2.8% Q/Qa) with consumption against amongst the drivers (+3.7% Q/Qa). Core PCE rose by 2.2% Q/Q, slightly stickier than 2.1% consensus. Pending home sales completed the hattrick, rising an impressive 7.4% M/M (2.2% Y/Y). US yields made an obvious attempt to build on this month’s gains on such good eco data, but the move lacked strength with nearby US elections causing some paralysis as well. Daily changes currently range between +3.8 bps (2-yr) and -3 bps (30-yr).

News & Views

UK Chancellor Reeves presented the first Labour budget before Parliament today. A raft of tax increases is projected to raise some £40bn to boost spending on public services and to cover a £22bn fiscal “black hole”. It’s the biggest revenue-raising package in a generation, consisting of an increase in the Capital Gains Tax and in the national insurance payroll tax for businesses. Reeves also lowered the threshold at which companies start paying the latter. On spending, she raises minimum wages and pensions but income tax thresholds will not be frozen beyond 2028-29. Reeves pledged to raise defense spending to 2.5% of GDP. With the hefty tax increase, Reeves seeks to balance day-to-day spending with revenues. This stability rule is met in 2027-28, two years earlier than required. Reeves tweak to the debt measure the government uses for its long-term debt reduction target frees up $70bn in additional room to invest. The autumn Budget comes with new OBR forecasts. Growth for this year and the next was upgraded to 1.1% and 2% and will vary between 1.5% and 1.8% in the four years after. CPI will average 2.5% in 2024 before picking up to 2.6% in 2025 and only settling at 2% by 2029. The OBR said the “Budget increases spending by £70 billion annually, with two-thirds on current and one-third on capital spending. Half is funded through tax increases which raise £36 billion annually and push the tax take to a record 38% of GDP. The rest is funded by £32 billion more borrowing annually.” It speaks of one of the “largest fiscal loosening in recent decades.” The UK’s Debt Management Office also updated borrowing forecasts for the occasion. It raised planned gilt sales for 2024-2025 to just shy of £300bn. That’s up £20bn compared to the April revision but in line with expectations. UK bond markets needed some time to digest Reeves’ plans. Gilts sell off across the curve, pushing yields between 4-8 bps higher; the front end underperforming. Sterling lost ground and trades in the meantime at EUR/GBP 0.835.