There is so much going on right now in markets, with several competing drivers and themes. Central bank policies and interest rate expectations, Middle East tensions and the oil price, China’s stimulus measures, plus an incoming earnings seasons and coin flip US Presidential election, all need to be considered. And yet, US stock markets continue to make fresh record highs as the soft landing plays out, boosted by the Fed’s recent half-point rate cut and a blockbuster jobs report. As one investment bank economist recently wrote rather aptly, “if all else fails, central bankers come to the rescue”.
We get to hear from the ECB on Thursday, with the bank fully expected to reduce rates by another 25bps. Forward guidance has been non-existent, but markets are convinced that growth is tilting further to the downside, suggesting that both headline and core inflation could be lower than previously expected. In fact, futures price in four back-to-back 25bp rate cuts from this meeting. That means, the bank would be pivoting to a faster easing cycle amid a high level of macro data uncertainty. But we are likely to hear that President Lagarde and co are ‘data dependent’ and have a meeting-by-meeting’ approach. Explicit mention of more rate cuts could see more EUR downside with the support area around 1.09 tested.
Sticking in Europe, two of the region’s biggest companies, LVMH and ASML are due to report results this week, kicking off earnings season on the continent. While the bloc’s economy stumbles in stagnation, corporate earnings are seen growing for a second straight quarter for the first time since Q1 2023, according to LSEG Data. That makes for a high bar to hurdle. However, as earnings expectations have been lowered coming into reporting season, analysts are still optimistic that Europe Inc will clear it.
Finally, it’s the middle of the month which signals a data heavy week of UK economic releases. This will guide the Bank of England’s next rate decision in early November. Pay growth is likely to soften on the back of a cooling labour market. A material drop in headline CPI, with the first sub-2% reading since April 2021, and services inflation should cement a 25bps rate cut in a few weeks time. A zone around 1.30 in GBP/USD may offer decent support to much weaker data.