In focus today
Today, the ECB is widely expected by both analysts and markets to deliver a 25bp rate cut. The moderation in the labour market and economic activity since the June meeting should lead to a further increase in the confidence of the disinflationary process being on track, in particular given the slowdown in wage growth. For more details, please see ECB preview – Dialling back, but pace uncertain, 5 September.
In Norway, the Regional Network survey is released, providing insights into capacity utilisation, which could be decisive for Norges Bank’s message on 19 September. Although Norges Bank advised markets in June against speculating on rate cuts this year, recent domestic and global developments have considerably increased the probability of a rate cut in 2024. If capacity utilisation metrics turn over significantly, we stand ready to adjust our current call for the first Norges Bank rate cut to not come until March 2025.
In Sweden, CPI for august is released. We expect CPIF inflation to drop significantly to 1.1% y/y in August, 0.6 pp. below the Riksbank’s forecast. Our forecast for CPIF excl. energy at 2.1% y/y aligns closely with the Riksbank’s view. If correct, focus is on how the Riksbank will handle such an outcome in its monetary policy.
Economic and market news
What happened overnight
In Japan, wholesale inflation for August was lower than expected at -0.2% m/m and 2.5% y/y, compared to consensus of 0.0% m/m and 2.8% y/y. The surprise was due to the yen’s rebound, which eased import cost pressures. The slowdown, expected to impact consumer prices in the months ahead, could influence the timing of the Bank of Japan’s (BoJ) next rate hike. Moreover, this morning, the hawkish BoJ member Tamura stated that rates must rise to at least 1% by late next year, as the likelihood of achieving the 2% inflation target sustainably has improved. Tamura’s comment, the first to specify a target rate, follows other BoJ members advocating for continued hikes despite market turmoil.
What happened yesterday
In the US, headline inflation in August was close to expectations at 0.2% m/m SA and 2.5% y/y (cons: 0.2% m/m SA, 2.6% y/y). Core inflation was slightly higher than expected at 0.3% m/m SA (cons: 0.2%), while the yearly figure matched expectations. The modest upside surprise was mostly driven by shelter prices, while price pressures elsewhere in the services sector, in core goods as well as in food and energy were close to expectations. Shelter, and more precisely the contribution from owners’ equivalent rent (OER) rose to the highest level since January. However, it should be noted that shelter CPI lags changes in the actual rental/real estate market by 10-11 months, implying that this should not be seen as a sign of re-accelerating inflation pressures. Hence, the print does not derail the Fed from cutting rates next week but supports our case of a 25bp cut. After the release, markets priced the odds of 25/50bp cuts at 85%/15% in favour of a smaller move.
Kamala Harris emerged as the stronger candidate in the presidential debate against Donald Trump. Harris conveyed a more forward-looking vision, while Trump mainly focused on criticizing the current administration and lacked clarity on his own initiatives. Republican strategists noted that while Trump’s performance was not seen as a major setback, his re-election bid appeared more uncertain. A YouGov flash poll showed 43% of viewers saw Harris as the winner, compared to 28% for Trump, with 30% undecided.
Harris now also seems to be the clear favourite according to prediction markets. However, the race remains close, particularly in the swing states. For details on the US election, see our US Election Monitor, 6 September, which we plan to update bi-weekly until election day.
The markets reacted to the debate by sending the USD and yields slightly lower, suggesting that expectations of Trump pursuing more expansionary fiscal policies and protectionist measures remain intact. Yesterday’s price action likely provides a good gauge for how markets may react to election news going forward, though the longer-term implications are less clear-cut.
In the UK, the monthly GDP figure for July was weaker than expected at 0.0% m/m (cons: 0.2%, prior: 0.0%), signalling an economy starting to lose steam, while the 3M/3M measure printed at 0.5% (cons: 0.6%, prior: 0.6%). The downside surprise was broad-based, driven by declines in industrial and manufacturing production as well as construction, while services continued to contribute positively. That said, it should be noted that this data is of volatile nature, and hence that the topside risk to demand is still in place – in line with the Bank of England’s expectation.
Equities: Global equities rose yesterday, led by US large-cap, cyclical growth stocks. This movement was prompted by a slightly higher-than-expected CPI, which sent the short end of the yield curve higher in the US, thereby reducing the likelihood of a 50-basis point cut next week. Hence, equity investors see it as a relief that the Fed may not need to implement a double cut, implicitly indicating that the economic outlook remains solid. Additionally, there was a significant cyclical rotation, with energy being the worst performer and tech performing exceptionally well. If yesterday’s boost to equities had been driven by strong growth or demand numbers, we would have likely seen more broad-based gains, and energy would not have underperformed so significantly. It is also important to note the negative correlation between bonds and equities on a CPI day. This indicates significant progress in the inflation normalization process and a shift in investor views on inflation. In the US yesterday, the Dow closed up by 0.3%, the S&P 500 by 1.1%, the Nasdaq by 2.2%, and the Russell 2000 by 0.3%. Asian markets soared this morning, with some of the most cyclical and tech-heavy markets up more than 3%. US futures are also trending higher, with European futures up by more than 1%.
FI: Today’s main event is the ECB meeting. A 25bp cut seems to be a done deal, and markets will therefore focus on guidance and the updated staff projections at the meeting. On Friday, the broad wage measure – compensation per employee – showed a noticeable decline in the annual wage growth in Q2 from 4.8% y/y to 4.3% y/y, and this has likely dampened some of the concern related to the still elevated domestic inflation measures in August. We expect Lagarde to confirm that ECB is entering the dialling back phase, but we do not expect a commitment to a specific timing of further cuts; thus, we do not anticipate that it will deviate from the meeting-by-meeting and data-dependent approach to the policy rate changes, thereby keeping its guidance’s optionality and flexibility. Markets are pricing 62bp this year and 126bp in 2025. See ECB preview – Dialling back, but pace uncertain, 5 September.
FX: While the USD gained modestly in yesterday’s session the most notable G10 move was the sell-off in NOK which stopped just around the 12.00 figure in EUR/NOK before the Norwegian currency found some well-needed support from Brent crude moving back above USD 70/bbl. EUR/SEK remains in the low 11.40s while USD/JPY failed to extend a move below 142. Finally, EUR/CHF rebounded just short of the 0.93-level before finding a newly weekly high around 0.94.
