Top 3 Economic Stories this Week

Japan and Switzerland Export Weakness Drives Q3 Contractions

Japan saw a contraction in their economy this week, after Q3 reports showed a decline of 0.4% in GDP. This was mainly due to a sharp decline in exports to both the US and China, as U.S. tariffs implemented on Japanese goods have weakened demand for key export industries within the Japanese economy. The situation was made worse by slowed down domestic consumption in Japan, and reduced business investment in Japan - which was thought to be a reflection of manufacturer caution. Switzerland saw a similar contraction in GDP for Q3 of 0.5%, which was also due to a decline in chemicals and pharmaceuticals exports which are usually Switzerland's most resilient sectors. A contributing factor to such a decline in exports was the Swiss Franc's relative strength, which made exports more expensive abroad. For markets, this highlights that the triple combination of higher trading costs, global demand weakening globally and continuing geopolitical tensions is leading to vulnerability in export-dependent economies. Analysts have suggested that within such economies, policy makers may need to support domestic demand in order to ameliorate weaker export markets.

U.S. Service Sector Shows Positive Signs

S&P Global services PMI reached 55 this week, its highest level in several months, displaying an uptick in US services activity. Reports suggest that the government reopening has led to improved client demand and better confidence among businesses. Growth among manufacturers was also present, but the pace was relatively modest which could portray how some factories are still recovering from a slower global demand. Analysts have raised concerns over job creation remaining weak in the U.S., as firms continue to report slower staff expansion due to rising cost pressures. Meanwhile wage growth has seemed to moderate which despite helping inflation, raises worries about how lower household consumption in the US may occur due to lower income. The mixed economic picture of companies optimism, combined with delayed commitment to long term investments until macro trends stabilise creates a difficult task for the Federal Reserve. While the progress made around inflation in the US shows positive signals, the softer labour data presents arguments against any form of tightening.

ECB Likely to Hold off on Rate Cuts

A Reuters-survey of economists has displayed agreement that the European Central Bank are likely to keep interest rates unchanged, possibly even through to the end of 2026. The decision displays the cautious view of the bank, with inflation and growth within the area remaining stable but fragile at the moment - we can see the bloc looking to avoid but disinflationary pressures and sharp economic swings. According to ECB council member Gabriel Makhlouf, a "material" change in economic conditions would be necessary for the central bank to move their rates. The signal of an extended pause in ECB policy is likely to bring a sense of calm to bond and currency markets, with investors already foreseeing the euro benefiting as such from a more predictable ECB policy path. Meanwhile, borrowers in the euro-area will benefit from predictable borrowing costs and this will help planning and investment decisions. The policy could also entail diversification value for global markets as a stable euro-zone path juxtaposes the volatility within U.S., UK and emerging markets.

Policy Pulse: Fed Displays Caution Despite Shutdown End

While the end of the longest U.S. shutdown in history did bring some certainty back, economic data flows have remained patchy which entails the Fed being left without the full picture on inflation and employment. For example, several releases on CPI components, labour market revisions and business inventories have been delayed. Fed officials emphasised that the U.S. economy is showing signs of resilience in the service industry but elsewhere they saw mixed signals this week (e.g., manufacturing). Most analysts agree that a December cut is unlikely, with traders assigning roughly a 40-45% chance - showing a notable shift from earlier optimism. Meanwhile, Bond markets have reflected the uncertainty the Fed faces around a policy trade off; softer hiring supports disinflation, but could demand could be undermined as an unintended consequence. Therefore, treasury yields drifted higher while investors contemplated the timeframes in which the Fed can safely pivot.

Industry Spotlight: Electric Vehicle (EV) Charging Infrastructure

EV Charging infrastructure as an industry, is accelerating. This is largely due to the rapid global adoption of electric vehicles, which has ultimately outpaced the existing charging networks - creating a significant infrastructure gap, acting as a demand driver. The faster build outs of this infrastructure has been forced by many developed economies governments setting aggressive EV targets. Furthermore, the demand for high-capacity fast chargers has soared after delivery vans, and public transport such as buses in many developed economies begin to switch to electric. Infrastructure funds (pooled investment vehicles that finances, builds, owns, and operates essential physical assets for society) as well as pension funds, have both displayed their views that EV charging is becoming an attractive stable-cash-flow asset similar to that of renewables or even telecom towers. The sector is not becoming - but is in fact already economically significant, as a pillar of green industrial policy, linking mobility, energy, and technology. The potential of the sector to create large amounts of high-skilled jobs in areas of engineering, etc, is huge. For investors, unlike what some have called speculative tech, EV charging has a clearly visible demand which is already protected by regulated frameworks. Furthermore, once networks are built, operators enjoy recurring revenue with relatively low marginal costs displaying strong signals for profit margins despite sizeable start up costs.