Early Morning Call: equity markets hesitant as DAX enters bull market

Equity market overview

European equity markets aren't showing any real direction this morning.

Yesterday, the German DAX entered the bull market, rising 20% from its September lows. In the last few hours, a series of comments from central bankers around the world all point in a same direction: the normalisation of rate hikes.

Yesterday, Federal Reserve (Fed) vice chair, Lael Brainard echoed Fed governor Christopher Waller's comment this weekend that interest rates need to keep rising to battle inflation, although potentially at a slower pace. Slowing the pace of hikes was also a scenario mentioned by French central bank governor, Francois Villeroy de Galhau, in a speech at a business conference in Japan: "We are clearly approaching what I would call the 'normalisation range' which can be estimated at around 2%. We should reach this level by December. Beyond this level, we will probably continue to raise rates, but we may do so in a more flexible and possibly less rapid manner. Jumbo rate hikes will not become a new habit."

As for the Reserve Bank of Australia (RBA) minutes published overnight, the bank is ready is open to all scenarios: it could either go back to larger hikes or mark a pause. The RBA has already been slowing the pace of its rate hikes, having raised its interest rates by ‘only’ 25 basis points at its last two meetings.

Major economic news

In China, three main indicators missed expectations overnight, showing that the recovery of the world's second economy is slowing. Industrial production rose 5% in October from a year earlier, missing expectations for a 5.2% gain, and slowing from the 6.3% growth seen in September.

Retail sales fell for the first time since May, dropping 0.5% against expectations for a 1.0% rise, and after a 2.5% gain in September. Fixed asset investment expanded 5.8% in the first 10 months of the year, versus expectations for a 5.9%.

In Japan, the economy unexpectedly shrank by 0.3% in the third quarter (Q3) compared to the second, missing market consensus of 0.3% growth. This was the first GDP contraction since Q3 2021. Private consumption, which makes up more than half of the Japanese economy, grew 0.3%, slowing sharply from the previous period's 1.2% gain.

In the UK, the unemployment rate rose to 3.6% in September, while October's claimant count came in at 3.300, after 25.500 the previous month.

Elsewhere in Europe, Germany ZEW economic sentiment is expected to rise to -50 in November which would be a five-month high for the index. In October, the index pointed at 59.2, a slight improvement on the 14-year low set in September.

Also at 10am, we'll get the second estimate of eurozone's second quarter GDP growth rate. Economists anticipate the euro area economy to have expanded by 0.2% during the third quarter.

In the US at 1.30pm producer price index for the month of October is expected. Expectations are for 8.3% year-on-year (YoY).

Also at 1.30pm we expect the NY Empire State manufacturing index and at 9.30pm the API crude oil inventories.

Earnings

Elsewhere on the equity markets, Vodafone's operating profit increased by 12.2% in the first half (H1). Revenue rose by 2% to €22.9 billion. The mobile phone operator downgraded its full-year (FY) free cash flow forecast by €200 million, and warned that earnings will come in towards the bottom if its guidance range.

Imperial Brands' operating profit fell by 14.7% in 2022 to £2.68bn. Reported revenue fell by 0.7% reflecting a negative impact of a weaker euro.

In the US Walmart and Home Depot start a busy week in terms of retail sector earnings. Analysts expect Walmart to post earnings of $1.31 per share, which represents a 9.7% decline on the same quarter a year ago. Revenue is expected to rise by some 5% to $147.18bn year-on-year. Investors will be particularly attentive to the level of stocks. Last quarter Walmart inventories rose nearly 26%.

Home Depot also is facing inventories issues, up 35% last quarter. The group is also expected to report earnings at lunch time. Analysts forecast earnings of $4.12 per share on revenue of $37.92bn.