Key events in developed markets next week

It is a key week for the US, with the midterm elections on Tuesday and the Federal Reserve’s FOMC meeting two days later. In terms of the election, opinion polls continue to suggest the Republicans are under pressure. The loss of Congressional control would make life increasingly difficult for President Trump and have major implications for policy. President Trump was already somewhat limited by congressional deadlock, but if the Republicans lose the House (but probably retain the Senate) it becomes even more challenging for him, i.e. he will struggle to pass major legislation.

Bi-partisan action may be possible in areas such as infrastructure spending, but for the most part, divisions between and within the two parties will remain material. Faced with this, President Trump will likely focus on areas where executive powers give him more leeway to set the agenda, such as trade policy. With China ramping up its fiscal stimulus, this hints that both sides will be “digging in” with little prospect of any meaningful easing of tensions.

As for the Federal Reserve meeting, while officials no longer describe monetary policy as “accommodative”, it is far from restrictive. A positive domestic story and rising inflation pressures mean the Federal Reserve will continue to signal “gradual” rate hikes ahead, setting us up for a December move.

After 3Q GDP data for the eurozone and some member states this week, it seems likely that German GDP growth will have gone through another soft patch. An entire batch of monthly industrial data coupled with September retail sales should hopefully shed some light on the eurozone's surprisingly disappointing third quarter, and if there's potential for growth to be revised upwards.

There’s little doubt the UK economy had a good run over the summer, helped along by the better weather. However, as we move into the winter, there’s a risk that momentum slows once again.

Consumers remain reasonably cautious, partly because higher petrol prices are offsetting the recent strength in wage growth. Meanwhile, the higher perceived risk of a 'no deal' Brexit is likely to see a greater proportion of firms take contingency action, and that’s already being tentatively reflected to some extent in the PMIs and hiring indicators. For that reason, it looks very unlikely that the Bank of England will hike rates before May 2019, at the earliest.

Next week sees a number of speeches from Swedish and Norwegian central bankers as both the Riksbank and Norges Bank seek to spell out their guidance for gradual interest rate increases over coming quarters. In Norway, the October inflation reading is a key data point; we continue to see upside risk to the NB’s inflation forecast but expect the bank to reiterate its intention to keep rate increases gradual - by which it means a pace of two hikes per year.