Market movers today
- PMI services from around the world and US ISM non-manufacturing are due out today. In particular, the US ISM non-manufacturing index will be interesting given the sharp fall in the ISM manufacturing index, which caused a repricing by the Fed. ISM non-manufacturing has been robust so far but the risk is the manufacturing recession spreads to the service sector. Also look out for the ISM non-manufacturing employment sub-index ahead of US non-farm payrolls tomorrow.
- We also have a range of FOMC members speaking, where hints of whether the Fed will ease again later this month or not remain key for market sentiment.
- UK Prime Minister Boris Johnson presented his Brexit proposal to the public yesterday and now it is up to the EU to decide whether the proposal can make a basis for further talks or not. Notably, the EU may have concerns as to whether the proposal is simply part of a blame game by PM Johnson. Officials generally welcomed a plan from the UK but EU Commission head Juncker said yesterday that 'problematic points' remain.
- In the Scandies, we get housing data out of Norway and PMI services out of Sweden, see next page.
Selected market news
Equities had a rough run on Wednesday after a somewhat weak ADP report spurred fears that the otherwise resilient-looking US consumer is starting to be hit by the global industrial slowdown. ADP (NASDAQ:ADP) employment on the headline came close to expectations at 135K vs consensus 140K but the previous month was revised down to 157K from 195K and thus on balance left the impression of weakening. The correlation of ADF to the all-important non-farm payrolls report from month to month is not high, but note that we have a below-consensus call of 100K on the latter for tomorrow. Then signs of a softening labour market will be key for the Fed, as comfort has so far been taken from US private consumption holding up well amid the manufacturing slump on the back of trade woes.
Equities sold off overnight, with the S&P down 1.8% and Nikkei down close to 2% on the day at the time of writing. Strong support was seen in US Treasuries and the curve bull steepened as 2Y yields dropped by 7.0bp and 10Y by 4.5bp. Regarding Fed pricing, the market is now pricing more than 70% probability of a 25bp October rate cut compared to 60% the day before. EUR/USD edged higher and is back above 1.0950, while Brent crude is below the levels seen before the latest Middle East tensions.
Tensions between the EU and the US flared up as the WTO authorised tariffs on USD7.5bn of notably aircraft and food products from the EU due to the subsidies provided to Airbus. Separately, the US high-level trade negotiations will likely start next week, and we now assign a 60% probability of an interim trade deal, which should help to de-escalate the trade war. However, the road to a big deal is still paved with many obstacles, in our view. However, an interim deal should be positive for risk sentiment in the short term.
Scandi markets
Norway. The housing market has stabilised and price growth has proven positive, but moderate. Hence, both upside and downside risks from the housing market have diminished. Based on solid fundamentals in the labour market as well as the balanced housing market, we expect housing prices to grow 2-3 % y/y at least throughout next year. However, data from the largest housing provider, OBOS, points to 1-2 % monthly growth in September, i.e. well above Norges Bank’s estimate from the latest MPR. However, this would probably be due to increasing demand as a result of fear of tighter regulations in the coming months.
Sweden. Today’s services PMI will be monitored closely, not least after the plunge in the manufacturing numbers triggered a distinct move higher in EUR/SEK. So how do the two compare? First, over time, there are no meaningful differences; manufacturing and services follow almost identical trends, only that manufacturing typically leads services by a few months. Second, on a monthly basis these series do not correlate well and it is not unusual for them to move in opposite directions. Considering the big drop in manufacturing, for the composite index to be steady at 53.6, this probably means that services need to rise to 56.4 (from 54.1). Risks are skewed to the downside here, in our view.
Fixed income markets
On the back of soft risk sentiment, yesterday 5y5y EUR inflation notably edged lower again and we repeat our call for a move towards 1% for the 5y5y EUR inflation measure, as the global recession risks intensify. Note that German yields actually ticked higher yesterday despite the downward pressure on European stocks and that periphery and semi-core underperformed.
Focus in respect of supply will be on France, which will introduce a new 10Y OAT (Nov- 29). France will also issue in the long end with taps in the May-50 and Apr-55 OATs. Given the upcoming redemptions and coupons of more than EUR157bn (EUR54.2bn in France alone) in October from next week, the EUR8–9.5bn supply should be relatively easy to place, even though we are in the very long-end of the OAT curve. Spain has also chosen to utilise the benign low-yield environment, the positive cashflow backdrop (EUR 27.4 in Spain) and the upcoming PSPP buying, and will tap in the 10y and 30y benchmark bonds and in the 8y linker. We look for decent demand despite the upcoming 10 November general election and the uncertainty it would create.
FX markets
EUR/USD held steady amid a broader sell-off in equity markets but high-beta currencies like the Scandies and AUD remain under pressure versus the EUR. Today, FX focus will turn to the last part of this month’s PMIs where, notably, the services indices are released for Sweden and the UK. Further, in light of the gloomy US ISM manufacturing, the nonmanufacturing one should get some attention. Notably, if the US non-manufacturing print comes out as gloomy as its manufacturing counterpart, we could see EUR/USD going back above 1.10 today. Further, our economists are now putting a 60% probability on an interim trade deal, see US-China Trade, which could fuel a temporary setback in the USD.
The PLN gained yesterday on the back of the central bank press conference, where the governor (1) ruled out the need for monetary easing and (2) played down the negative impact of today’s expected EU court ruling on the Polish banks and economy. Should the EU ruling be less negative, there may be downside risk to our 1M EUR/PLN forecast of 4.42 – and even more so if we get an interim trade deal between the US and China next week.
Finally, note that in FX Strategy: G10 FX performance across the industrial cycle we provide a historical overview of G10 FX return distributions conditioned on the global industrial cycle. In short, history suggests that investors who expect further deceleration should be long JPY, CHF and USD and short GBP, AUD, SEK and NOK. Investors who are more upbeat should be long AUD, GBP and NZD - but stay on the side-lines in Scandies until the industrial cycle expands again – and short CHF, USD and JPY.
Key figures and events
