Over the weekend, focus will turn to the Taiwan election on Saturday with the election of a new President as well as the parliament (Legislative Yuan). Polls are not allowed 10 days before the election but the most recent surveys show a tight margin between the ruling party DPP's Lai Ching-te (36%) and KMT's Hou Yu-ih (31%). A victory for Lai would point to more of the same, with an independence-leaning stance, whereas a victory by Hou could ease tensions in the Taiwan Strait, as KMT has a less confrontational stance towards Beijing. However, even if Lai wins, China-Taiwan tensions might ease, as Lai will have a weaker mandate to confront China than the current president Tsai Ing-wen, who got support from close to 60% of the voters in 2020. DPP will likely also lose its majority in the Taiwanese parliament, as a fairly new Party, Taiwan's People's Party (TPP), and its leading candidate, Ko Wen-je, have close to 25% support in the polls.
Yesterday's, US October CPI surprised to the downside both in headline (+0.04% m/m SA; consensus +0.1%, Sep +0.40%) and core (+0.23% m/m SA; consensus +0.3%; Sep +0.32%) terms. Shelter accounted for the majority of the downtick in core inflation, but promisingly for the Fed, price pressures in the broader services sector also appeared to moderate.
Risk sentiment remained shaky over the past week as markets digested a mix of renewed geopolitical worries, mixed data on inflation and cautious signals from the central bankers. The conflict between Israel and Hamas has quickly escalated into the worst bloodbath in 50 years on both sides. Hamas's attacks are estimated to have caused 1300 casualties, most of which civilian, while Israel has begun a massive counteroffensive towards Gaza in response. Possible involvement of the Iran-backed Hezbollah remains a key worry, although many of the surrounding Arab nations, including Qatar and Egypt, have so far pushed to avoid further escalation. As both Israel and Iran are small natural gas exporters, and the production of the former has already been affected, European natural gas prices rose by around 40% this week. Oil markets have remained calmer, dampened by cooling demand and spare production capacity especially in Saudi Arabia. Read our early take on the outlook from Monday: Geopoli
Today we receive the final August inflation figures for the euro area where we do not expect any revisions compared to the flash estimate. The flash estimate showed that inflation in August was slightly higher than expected. Headline inflation remained at 5.3% and core inflation ticked down from 5.5% to 5.3% y/y. In today's release, it will be interesting to see the underlying dynamics of the aggregate prints especially the details on the decline in core inflation. For more details on inflation, see Global Inflation Watch: Underlying price pressures remain sticky, 13 September.
We expect the ECB to hike by 25bp at today's meeting. The market pricing is 16bp (up 3bp since yesterday) following the Reuters story on an upward revision to the 2024 inflation forecast in today's staff projections. In our opinion, this is a natural (and expected) consequence of rising energy prices since the latest projection round in June. The key factor for today's decision will be the projected core inflation path until 2025.