ECB cuts while China slips

The European Central Bank cut rates by 25bps at its October Governing Council meeting, the second meeting in a row where they cut rates even as the accompanying statement noted that the bank was “not pre-committing to a particular rate path.” The ECB said that the “disinflationary process is well on track” and that recent “downside surprises of economic activity” would weigh on inflation. The most recent estimate for inflation across the Eurozone had headline inflation of 1.7% y/y in September, below the ECB’s medium-term target. According to the bank, “domestic inflation remains high” and it will keep “rates sufficiently restrictive” to ensure inflation stays close to target levels. While the aggregate Eurozone wide inflation level is soft, there is a wide dispersion of price pressures. Germany’s inflation rate of 1.8% stands in contrast to inflation of more than 3% in the Netherlands for example.

Turkey’s central bank kept its benchmark one-week repo rate on hold at 50.00% at its MPC meeting yesterday, the sixth straight hold from the TCMB. The decision was widely anticipated, especially after m/m inflation accelerated in September to 3.0%, from 2.5% in August and annual inflation was at 49.4% compared to a predicted 48.3% (although this did put real rates in positive territory for the first time since July 2021). In its statement, the TCMB pledged to maintain its tight monetary stance ‘until a significant and sustained decline in the underlying trend of monthly inflation is observed…’

The Central Bank of Egypt kept its interest rates on hold at its MPC meeting yesterday, leaving the benchmark overnight interest rate at 27.25% for the fourth meeting in a row. The bank's statement attributed a recent modest acceleration in annual inflation to adjustments around subsidies and utilities prices which offset easing food price pressures, and the bank remained of the view that inflation was easing, 'albeit restrained by the drag of fiscal measures.' The bank expects price growth to stabilize around current levels before easing in Q1 next year, and given the ongoing pledge to 'maintain the prevailing tight monetary stance until a significant and sustained decline in inflation is realized', we now expect that the first rate cuts from the CBE will now come in 2025.

China’s economy expanded by 4.6% y/y in Q3, ahead of market expectations, but still cooler than the growth of 4.7% recorded in the prior quarter. For the nine months until the end of September China’s economy has growth by 4.8%, short of the government’s target rate of 5%. For September industrial production rose by 5.4% y/y, up from 4.5% a month earlier, while fixed asset investment rose by 3.4% year-to-date as of September, holding steady on a month earlier.

Nominal retail sales in the US increased by 0.4% m/m in September, an acceleration from the 0.1% rise a month earlier. Core retail sales, stripping out fuel and car purchases, rose by a strong 0.7%. Control group sales, which are included in GDP calculations, were also higher by 0.7% m/m. Elsewhere in the US data, initial jobless claims dropped last week to 241k, down by 19k from the storm impacted data released earlier in the month. Continuing claims rose to 1.87m, however, their highest level since July.

Today’s Economic Data and Events

• 10:00 UK retail sales m/m Sept: forecast -0.4%
• 16:30 US housing starts Sept: forecast 1.35m
• 16:30 US building permits Sept: forecast 1.46m

Fixed Income

• Treasury yields picked up yesterday as positivity around the outlook for the economy was reinforced with the good retail sales data. Yields on the 2yr UST rose by 3bps to 3.9719% while the 10yr yield added almost 8bps to 4.0906%. Markets are still pricing in around 23bps of cuts when the Fed meets next month.
• Bond markets were generally softer overnight.

FX

• The dollar was higher against most peers overnight. EURUSD fell by 0.3% to 1.0831 though the reaction to the ECB was relatively muted. USDJPY added 0.4% to push the pair up above 150 for the first time since July. Sterling was a relative outperformer among major currencies with a gain of 0.2% at 1.3011.
• Commodity currencies were mixed. USDCAD pulled higher by 0.3% to 1.3795 while AUDUSD rose by 0.4% to 0.6696 and NZDUSD closed near flat.

Equities

• US equity markets closed after a mixed session. The Dow Jones managed a rise of 0.4% while the S&P 500 was marginally lower and the NASDAQ settled near flat. European markets were more robust with a 0.8% gain in the EuroStoxx index and the FTSE rising by 0.7%.
• Regional markets had a softer day with the DFM down by 0.6% and the ADX lower by the same amount. The Tadawul also lost ground with a drop of more than 1%.

Commodities

• Oil prices edged higher overnight with a 0.3% rise in Brent prices to USD 74.55/b and WTI up by 0.4% at USD 70.67/b. Data from the EIA showed a 2.1m bbl draw in crude stocks last week along with draws in gasoline and distillate inventories. Oil production, however, did rise to 13.5m b/d, a new record high for the US.