Market volatility to be followed by economic fireworks that could determine the fate of your investments and the forint
One of the most important market events of the past week was the Federal Reserve's decision on Wednesday to cut its benchmark interest rate by 25 basis points, as expected. The Fed also announced that it would end its balance sheet reduction — in other words, it will stop its monthly bond sales. While this signals a significant easing of liquidity, Jerome Powell has repeatedly indicated that another rate cut in December is by no means certain.
The defining geopolitical event of the week was the meeting between US President Donald Trump and Chinese President Xi Jinping in Asia. During the meeting,
they agreed to maintain supplies of rare earth metals and other strategic raw materials, as well as reducing certain US tariffs affecting China.
This has led to a sense of cautious optimism in the market. While concerns about previous trade tensions have eased, participants remain cautious as the details of the agreement are not yet fully known. In terms of macroeconomic data, inflation in Europe slowed to 2.1% in October, and
the European Central Bank left interest rates unchanged on Thursday, providing no clear indication of their future direction.
Last week, Congress failed to reach an agreement on ending the government shutdown. The Senate adjourned at the end of the week without achieving a breakthrough, meaning the shutdown will continue into next week and any expectation of government data releases will be in vain. Debate stalled between the Republicans' temporary funding proposal and the Democrats' conditions, which included health insurance subsidies. Meanwhile, on Friday, a court ruling prohibited the complete suspension of the food aid programme.
US stock markets closed higher on Friday. The Nasdaq Composite gained 0.61 per cent to reach 23,724.96 points. The S&P 500 rose 0.26% to reach 6,840.20 points. Meanwhile, the Dow Jones Industrial Average ended the day up 0.09% at 47,562.87 points. The week's performance was also favourable, with the S&P 500 closing up 0.7%, the Nasdaq up 2.2%, and the Dow up 0.8%.
In fact, October was a strong month overall: the S&P 500 rose by 2.3%, the Nasdaq by 4.7%, and the Dow by 2.5%. The latter closed in positive territory for the sixth consecutive month.
In contrast, the mood on European markets was more subdued. By the close of trading on Friday, the British FTSE 100 fell by 0.1%, the French CAC 40 by 0.4%, and the German DAX by 0.8%.
The Stoxx Europe 600 index, which covers the wider European stock market, fell by 0.5%. Investor caution was heightened by the ECB's lack of guidance and the inflation data: while inflation in the eurozone continued to moderate, the 3.4% increase in the service sector suggests that internal price pressures are persisting. Consequently, trade and monetary news in Europe generally elicited a cautious, slightly negative market reaction.
What happened on the currency markets?
The EUR/USD exchange rate weakened significantly over the course of the week, dropping from approximately 1.16 to 1.1537. The Fed's cautious tone regarding interest rate cuts, coupled with the announcement that balance sheet reduction is coming to an end, played a role in this movement, which favoured the dollar overall. The easing of trade tensions following the Trump–Xi meeting also supported the dollar, causing the euro to weaken further.
During the week, the exchange rate of the forint against the euro changed only moderately, showing a slight decline to around 388. Thus, the forint remained stable against the euro, despite the ECB's lack of guidance and the rise in service inflation painting a somewhat more uncertain picture.
The USD/HUF exchange rate rose to around 336.37 by the end of Friday, representing a slight weakening of the forint. The dollar was supported by the Fed's communication and easing geopolitical tensions, causing the forint to underperform against the US currency.
What to keep an eye on this week?
On Monday, the September credit institution balance sheet from the National Bank of Hungary (MNB) will open the week, providing an overview of corporate and retail credit dynamics and banking sector liquidity. In the US, the start of daylight saving time will affect the timing of market openings and data releases. In the afternoon, the manufacturing PMI and ISM manufacturing index will be released, indicating the current position of the Fed's interest rate cuts and the inventory cycle in the real economy. The ISMs may be particularly important this week as they could influence the formation of interest rate expectations and the short-term direction of the dollar and risk appetite.
On Tuesday morning, the Hungarian Central Statistical Office (KSH) will publish third-quarter housing construction and permit figures. These will reveal the extent to which high interest rates are slowing down the supply of construction and the investment cycle.
Earlier in the morning, Japan will release its purchasing managers' index data, while the US will publish figures on its foreign trade balance and industrial durable goods orders in September. These will provide an indication of global demand, the capital expenditure (capex) cycle, and the state of supply chains. Together, the trade deficit and order backlog could be the main drivers of growth and corporate earnings expectations in this ongoing period of renewed tariff wars.
On Wednesday, the MNB's September insurance statistics will be released, providing an overview of the household financial cycle through insurance premium revenues and investments. In the evening, the results of MSCI's quarterly index review will be announced. These results may trigger inflows and outflows through changes in the weightings of certain Hungarian and regional stocks. Internationally,
German industrial orders in September provide an indication of the depth of the manufacturing cycle and external demand. In the US, meanwhile, mortgage applications, ADP employment, the afternoon PMI and the ISM manufacturing index offer a snapshot of labour market and manufacturing dynamics in the short term. ADP typically reflects the preliminary sentiment ahead of Friday's official labour market data, while the MSCI review may trigger significant, albeit technical, market movements at the end of the day.
On Thursday morning, the Hungarian stats office will release its industrial production and retail sales figures for September. These are key indicators of the state of recovery of Hungarian exports and domestic demand, and of the extent to which they are being held back by high real interest rates and weaker external demand. The Hungarian industrial data is particularly important for understanding the trajectory of third-quarter GDP, which showed signs of stagnation when it was released last week.
Abroad, the German industrial production figures for September are expected to be a key indicator of growth prospects in Europe, particularly in Hungary. Eurozone retail sales figures will also be released. In the afternoon, the Bank of England's interest rate decision could cause market volatility. Due to the US government shutdown, labour market data is not expected, but changes here are still possible.
On Friday morning, the latest data on Germany's foreign trade balance will be released. This is particularly important at the moment because global demand, relations with China and energy prices are all having an impact on German export performance. This, in turn, is having an indirect effect on European industrial chains, especially in Hungary, as well as on the risk assessment of the forint. Domestically, the October international reserve data from the MNB will provide an indication of external vulnerability and market inflows/outflows, which is important for the stability of the forint.
In the US, the Federal Reserve's next steps may be influenced by the non-farm payroll, activity rate and Michigan sentiment index if the labour market continues to cool.
Macro data will also be released on Sunday. China's October inflation figures will indicate the strength of domestic demand, deflationary pressures and the need for further stimulus. This data could influence market sentiment at the start of the week through its impact on commodity and European export prospects.
Cover image (for illustration purposes only): Getty Images
