Market movers today
Focus remains on euro area inflation in August . Yesterday’s German and Spanish figures were both higher than expected but the upside surprise was driven mainly by energy price inflation and the higher inflation should not alter the ECB’s current view on its monetary policy strategy. We have revised our euro area headline inflation forecast slightly higher to 1.5% y/y in August but still believe core inflation will move in the opposite direct ion and decline to 1.1% y/y in August . As we have argued previously, the stronger euro will become a headwind to inflation in 2018 and 2019,
Euro area and German unemployment rate figures are also due for release today. Both figures have declined over the past years and the German unemployment rate is very low in a historical perspective. This has been one factor supporting consumer sentiment , which is at the highest level in more than 15 years. The ongoing strong economic situation in Germany bodes well for Angela Merkel in the upcoming election. See more about the possible outcome at the election in German Election Monitor No. 1: Next euro area election unlikely to rock the boat, 29 August 2017.
US inflation figures will at tract attention in the afternoon with the release of the PCE figure. The decline in PCE core inflation in the first half of this year has sparked some concern about lack of inflation pressure within the Fed. Nevertheless, the Fed has said quantitative tightening will begin ‘relatively soon’ and we expect it to be announced in September. The Fed getting ready to pull the trigger on quantitative tightening means USD liquidity could start to become scarce from Q4.
Selected market news
Overnight , Chinese PMI manufacturing rose to 51.7 in August from 51.4 in July against the expectations of a drop. This adds to the perception that the world economy is in good shape, as euro area growth is strong at the moment and US Q2 GDP growth was revised up to 3.0% from 2.6% yesterday.
The Trump administration seems divided on the North Korea situation. While President Trump tweeted yesterday that ‘talking is not the answer’, Defense Secretary James Matt is said that the US is still trying to find a diplomatic solution. The administration is expected to brief the Senate on the situation next week. For more on the North Korea crisis see Flash Comment: Another wave of escalation in North Korean crisis, 29 August 2017.
Bloomberg has an excellent overview of why the Brexit negotiations are progressing slowly (the third round is taking place this week). While the EU says the UK needs to clarify its positions, the UK accuses the EU for not being flexible enough. While it seems unlikely that the first phase of the negotiations can be concluded before the EU summit in October, one has to take into account that it is normal for political negotiations to progress slowly until close to midnight
