The Fed taking it slow, UK budget done, diverging growth in the Eurozone and market volatility before & after the US elections

Next week, all eyes shall be on the US elections; this week feels like the quiet before the storm (and we’re having a ‘Swiftie’ moment as we try to remember that life isn’t about how to survive the storm, but about how to dance in the rain). In this week’s What to Watch report, we analyze key emerging trends: The Fed is expected to implement a cautious 25 basis point rate cut after the US elections, influenced by persistent core inflation, and changing immigration patterns. In the UK, the Labour government’s autumn budget includes substantial tax hikes aimed at boosting public services, with a positive long-term growth outlook (while the immediate effect of higher taxes may outweigh the benefits of increased spending). Meanwhile, the Eurozone shows mixed growth, with Spain and France leading while Germany and Italy lag. Finally, heightened market volatility is anticipated as the US elections on November 5 draw near, driven by shifting political forecasts.

Bonus material: a fresh episode of our Tomorrow podcast and updated country risk reports for a batch of European countries. Stay curious!

What to Watch this week

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The Federal Reserve (or short ‘Fed’): taking it slow after the jumbo cut… and the elections. The Fed is set to cautiously continue easing monetary policy, with a 25bps rate cut likely at the next FOMC meeting on 6-7 November after the US elections. Key economic indicators show a resilient economy, while core inflation remains sticky in rentals. Strong immigration flows have expanded the labor force and prevented inflation from re-accelerating despite loose overall financial conditions. But the reversal of these flows at the US-Mexico border following Biden’s executive order in June could re-ignite inflationary pressures by at least +0.2pp in 2025 if financial conditions remain as loose as they are currently. This means that the Fed will proceed gradually with rate cuts next year (25bps at each meeting from November 2024 until June 2025), bringing the Fed Funds Rate down to the 3.25-3.5% range.

UK budget: the ‘Reeves’ moment. As expected, the Labour government’s autumn budget relies on new tax hikes of up to GPB40bn to fund additional public investment and public services such as the NHS over the next five years, although they will be introduced gradually. In total, we estimate a fiscal impulse of -0.4% GDP in 2025 and broadly neutral in 2026. With the investment-to-GDP ratio set to hit its highest level since 1992 in 2026, the budget is overall a net positive for the UK’s long-term growth prospects from 2026 onwards, thanks to the strong growth effect of investment.

Eurozone GDP: Spain and France on the fast track while Germany and Italy are stuck in the slow lane. The Eurozone economy grew by +0.4% q/q in Q3 2024, slightly exceeding expectations. France (+0.4%) and Spain (+0.8%) outperformed, driven by strong private consumption, while Germany (+0.2%) remained sluggish and Italy stagnated, with domestic demand failing to gain momentum in both countries. For the Eurozone, we expect growth to stay slightly above potential, driven by consumption and investment. Meanwhile, inflation in October moved up to 2.0% y/y from 1.7% last month (core stayed put at 2.7%), which confirms our view of an ordinary 25bps cut for the ECB in December, contrary to recent rumors calling for a potential 50bps cut ahead. However, the upcoming US election could potentially also shift our forecasts for the Eurozone.

US elections: brace for market volatility before and after 5 November. With polls leaning again towards a Trump win at the US election next week, markets are adjusting accordingly. The US yield curve has shifted up in anticipation of inflationary policies such as tariffs and tax cuts. Concurrently, oil and gas stocks are surging, while renewables struggle, and Bitcoin is nearing its all-time high. Nevertheless, with the election still being a coin toss, option markets show increased hedging activity from investors who brace for volatility. We also expect swings in both directions – yields and equities may fall with a Harris win or rise further with a Trump win.

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Fresh episode of our Tomorrow podcast

The latest episode just aired, check it out here . Physical climate risks are driving up disaster-related costs, which will ultimately translate into increased economic volatility, higher average inflation, and lower real growth. What will this mean for investors? We find out in this episode with Lead Investment Strategist @Basco Carrera, Jordi (Allianz SE) and Senior Investment Strategist @Griesbach, Bjoern (Allianz SE). Read the full report? "Long-run capital market returns in times of climate change".

Country risk updates

• Austria : Rated AA1 (low risk for enterprises), though in distress given the high export dependence, an elevated public debt, and unfavorable demographics.
• Estonia : Rated A2 (medium risk for enterprises), as growth outlook is weak but economic fundamentals remain strong.
• Finland : Rated AA1 (low risk for enterprises), enjoying the end of an economic slide with an attractive business environment, high R&D spending, and a highly skilled workforce.
• Latvia : Rated A2 (medium risk for enterprises), and a gradual economic recovery looming ahead.
• Sweden : Rated AA1 (low risk for enterprises), embracing a long-awaited reversal amidst .