US mid-term elections in focus today

The US holds mid-term elections today where seats in the House of Representatives and Senate are up for a vote. This year’s election will serve as a referendum on President Joe Biden’s stewardship of the US economy at a time when growth is slowing, interest rates are moving up rapidly and inflation is near historic highs. The latest polling estimates suggest that the Republican Party will take control of the House and Senate, frustrating president Biden’s economic agenda. With the legislative and executive offices of government split between polarized parties, the prospect for comprehensive economic policy making is likely to be limited and will probably fall on institutions like the Federal Reserve to continue guiding the economy.

Industrial production in Germany came in stronger than expected in September, rising by 2.6% y/y compared with market estimates of 2% growth. Consumer goods were behind the improvement in September as the subcomponent increased on an annual basis for the first time since May. Capital goods output also pushed higher, up nearly 12% y/y in September likely as a result of better vehicle output. Germany’s economy did manage to expand by 0.3% q/q in Q3, better than markets had been expecting, but risks are high that Europe’s largest economy will slow and move into a recession in the next several months.

The Qatar Financial Centre PMI survey slipped into contractionary sub-50.0 territory in October as it fell to 48.4, from 50.7 the previous month. This is the first negative reading since June 2020, at the peak of the pandemic crisis. The fall in the headline reading was driven by a sharp slowdown in new orders and cuts to headcount as firms started to wrap up their preparations for the fast-approaching FIFA World Cup. Output continued to expand, albeit at a slower pace than seen through the start of the year.

Today’s Economic Data and Events

• 14:00 EC Retail sales y/y Sept: forecast -1.1%
• US mid-term elections

Fixed Income

• US Treasury yields closed higher as a large slate of corporate credit issuances sucked up fixed income demand. Yields on the 2yr UST added 6bps to 4.7217% while the 10yr UST yield added 5bps to 4.2135%. Market focus will probably be on election monitoring today so price action may end up being quite choppy in UST markets.
• Bond markets in Europe all closed weaker overnight, led by a 10bps spike in 10yr gilts to 3.629% as markets are showing limited appetite for the Bank of England’s sale of government bonds. Bund yields added 5bps to 2.338%.

FX

• Currency markets generally moved to risk-on positions, helping to sink the US dollar against most peers. EURUSD added 0.6% to 1.002 while GBPUSD added almost 1.2% to USD 1.1514. USDJPY closed relatively unchanged at 146.63. With a binary event like the US mid-terms underway, currency markets may tread water until a clearer direction is knowable.
• Commodity currencies closed more mixed with USDCAD added 0.11% to 1.3494 while both AUDUSD and NZDUSD added about 0.14% each to 0.6479 and 0.5939 respectively.

Equities

• The week started with a bout of risk-on sentiment in equity markets. Asian markets kicked off the gains at the start of the day with the Shanghai Composite closing up 0.2% and the Hang Seng 2.7% even as the prospect of easing of Covid restrictions waned. Japan’s Nikkei added 1.2%.
• In Europe, a strong upwards surprise from Germany’s industrial production data helped the DAX add 0.6% yesterday, while the FTSE 100 dropped -0.5%. In the US, all three benchmark indices closed up with the NASDAQ, the S&P 500, and the Dow Jones adding 0.9%, 1.0% and 1.3% respectively
• Locally, the DFM gained 0.9% and the ADX 1.2%. Saudi Arabia’s Tadawul ended the day up 0.7% after recouping losses earlier in the session, while Egypt’s EGX 30 added 2.4%.

Commodities

• Oil prices started the week on a softer footing with a drop of 0.66% in Brent futures to USD 97.92/b and WTI falling by 0.9% to USD 91.79/b. China seemed to walk back any notion of easing its Covid-zero policies, weighing on the near-term demand story.

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