Riksbank surprises with cut

In focus today

• Today is light on the data front, with no immediate market movers due.

Economic and market news

What happened overnight

In Japan, PMIs showed a mixed picture in September. The manufacturing PMI dropped to 48.4 from 49.7 in August, marking the lowest level since March, with new orders hitting a five-month low. In contrast, services PMI remained resilient at 53.0, only slightly down from 53.1 in August, supported by strong domestic demand. Cost pressures eased for manufacturers, with input price inflation falling to early 2021 levels, though output price inflation ticked up. The composite PMI declined to 51.1 from 52.0 in August, indicating slower overall growth.

In geopolitics, Trump met with Zelenskiy at the U.N. General Assembly and later declared that Ukraine could retake all its occupied territory, citing Russia's economic struggles. Kyiv welcomed the remarks as a "big shift," though no new US policy measures, such as additional sanctions, were announced. In his hour-long speech earlier in the day, Trump dismissed global efforts to recognise a Palestinian state, aligning with Israel, and criticised the U.N., European nations, and global policies on climate change and migration, advocating stricter immigration controls and stronger measures against Russia.

What happened yesterday

In Sweden, the Riksbank decided to cut rates to 1.75%, against market pricing, consensus, and our call for an unchanged policy rate. It signalled in the rate path that this marks the end of the easing cycle with no probability of further cuts. As we had expected the rate cut to come in November, we now anticipate the Riksbank will stay on hold from here.

In the US, PMIs came in slightly softer than expected. Manufacturing declined from 53.0 to 52.0 (cons: 52.2), while services dropped from 54.5 to 53.9 (cons: 54.0). Despite the decline, the data still suggests decent growth overall. Manufacturing output prices fell notably from 60.1 to 56.5, while services output prices declined from 59.1 to 56.0, indicating easing inflationary pressures.

Federal Reserve Chair Jerome Powell emphasised the Fed's need to balance inflation risks with slowing job growth, noting that current rates of 4-4.25% are high enough to curb price pressures. He reiterated that policy remains flexible, cautioning against both cutting rates too quickly and keeping them restrictive for too long. Powell also noted slowing job growth and persistent inflation pressures.

In the euro area, September PMIs came in largely as expected, with a positive surprise in the services sector offsetting weaker manufacturing data. The composite PMI edged up to 51.2 (from 51.0), driven by stronger services activity at 51.4 (up from 50.5), while manufacturing contracted to 49.5 (down from 50.7). The rebound in services highlights resilient domestic demand, suggesting stronger-than-expected growth in Q3. Price pressures remained subdued, with euro area price indices easing slightly in September. We maintain our forecast for the ECB to keep the deposit rate unchanged at 2.0% through 2025 and 2026, a view increasingly reflected in market pricing.

In the UK, PMIs came in weaker than expected, with the composite index falling to 51.0 in September from 53.5 in August. Both services and manufacturing declined, though services remained in expansionary territory at 51.9. Price indices eased marginally, and the employment index stayed weak at 46.6. The weaker data supports the BoE's signal last week that a November rate cut remains a possibility, and September CPI and labour market data will be key in shaping the outlook.

In tech, Nvidia's planned USD 100bn investment in OpenAI raises questions about funding gaps and market competition. The deal includes an initial USD 10bn for AI infrastructure but leaves OpenAI requiring additional capital for its ambitions. The partnership could reshape competition, with Nvidia potentially prioritising OpenAI over rivals like Anthropic or AMD, while also strengthening OpenAI's position in its Oracle cloud contracts.

In New Zealand, Anna Breman, currently First Deputy Governor of Sweden's Riksbank, was appointed the first woman to serve as Governor of the Reserve Bank of New Zealand. Breman, starting her five-year term on 1 December, said the Reserve Bank would remain "laser-focused" on low and stable inflation under her leadership, and that she will strive for transparency, accountability and clear communication.

Equities: US equities struggled with the US growth outlook following the PMI report yesterday. This, coupled with Powell's lack of clear guidance on whether he would support an October rate cut as he described the current stance as 'modestly restrictive', drove the VIX higher as well. It was a textbook growth scare in markets, with equities lower, yields lower and the VIX moving higher, while the USD remained virtually unchanged. Overall, US equities faced a challenging day, with the S&P500 down 0.6% and Nasdaq down 1%. Powell's comments came after the European close, explaining the positive numbers in Europe (Eurostoxx +0.3%) by the end of the day. Expect a carry-over weak opening this morning. Nikkei was marginally lower at the time of writing.

FI and FX: EUR/USD continues to hover around the 1.18 mark in what appears to be a post-FOMC consolidation phase for the USD. Following a series of sessions with higher bond yields in the US, Treasuries firmed somewhat yesterday - US10y at 4.10%. Fed's Powell balanced the upside risks from inflation and downside dittos from the labour market. The Riksbank's 25bp rate cut announcement from yesterday, bringing the policy rate to 1.75%, was interpreted as hawkish by markets. Despite only 8bp being priced ahead of the announcement, the short-end of the curve hardly budged. EUR/SEK was more or less unchanged on the day and we recommend to go long USD/SEK (see more below).