Close-fought contest for control of US Senate

Voting in the US mid-term elections is still underway with only a few seats in the House of Representatives or governors declared so far. At this early stage of vote counting, no major flips have taken place that would shift the Senate over to the Republicans. However, most polls heading into the elections suggested that Republicans would take control of the House, frustrating the economic agenda of President Joe Biden. That is likely to lead to lower levels of government spending, which may end up helping the Fed on its inflation fight, but also at the risk of slowing the economy further if Republicans don’t support any stimulus measures should the US economy hit a recession in 2023. Once a clearer picture of the legislative landscape in the US emerges we will be in a better position to identify the economic trajectory for the US.

Retail sales in the Eurozone rose by 0.4% m/m in September while data for the previous months was also revised upward. The relatively positive data print may have been the last for some time, however, as the economic picture across the Eurozone economy worsens under the weight of high inflation and rising interest rates. Consumer confidence in the Eurozone is solidly negative, at -27.6 as of October.

Inflation in China continued to underperform with the latest reading for October showing that producer prices fell by 1.3% y/y after a near 1% gain a month earlier. Consumer prices rose by 2.1% y/y, slower than the near 3% rise recorded in September and market expectations for October. A slowing economy with consumer demand crippled by the country’s adherence to a Covid-zero policy will keep inflation low in China. Key for the rest of the world is whether the weakness in producer prices gets passed on via exports, potentially pushing prices for merchandise lower globally.

Today’s Economic Data and Events

No major data releases today

Fixed Income

• US Treasuries were stronger overnight thanks to good auction results for the sale of 3yr notes. Yields on the 2yr UST dropped 7bps to 4.6506% while the 10yr UST yield dropped 9bps to 4.1234% at the close. Developed market bonds generally closed higher overnight with bund yields down 6bps at 2.274% and gilt yields falling by 9bps to 3.539%.
• Emerging market bonds leant toward positive closes with South African yields down 5bps at 10.953% while emerging Europe pulled stronger.

FX

• Currency markets swung against the dollar in line with the drop in yields overnight. EURUSD rallied for a third day running, up 0.5% to 1.0074, holding the parity line for two consecutive closes. USDJPY also pulled lower, down 0.6% to 145.68 while GBPUSD added 0.3% to 1.1544.
• Commodity currencies rallied overnight, strengthening against the dollar. USDCAD dropped by 0.5% to 1.3427 in favour of the loonie while AUDUSD dropped 0.4% to 0.6507 and NZDUSD dipped by 0.3% to 0.5955.

Equities

• The potential for political deadlock in the US should the Republican Party take control of Congress has been taken positively by equity markets as such situations have boosted share prices in the past. Yesterday, the NASDAQ, the S&P 500 and the Dow Jones added 0.5%, 0.6% and 1.0% respectively.
• In Europe, the positive surprise on industrial production helped the DAX to gain 1.2% while the CAC added 0.4%. The FTSE 100 lagged with a 0.1% gain.
• Locally, the DFM closed up 0.2% while the ADX dropped -0.1%. Saudi Arabia’s Tadawul fell -1.0% and Egypt’s EGX 30 -1.5%.

Commodities

• Oil prices dropped sharply overnight with Brent futures down 2.6% at USD 95.36/b and WTI giving up more than 3.1% at USD 88.91/b. The EIA cut its supply forecast for US oil production in 2023 to 12.31m b/d, moderately lower than previously but the fifth downward revision in a row. US oil output has flatlined this year and is only set to grow thanks to lower levels in 2021.
• The API reported a build in US crude inventories of 5.6m bbl last week along with gains in gasoline stockpiles. Diesel inventories fell by 1.8m bbl.

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