In focus today
Focus is on the German inflation data for September. Last week both the French and the Spanish inflation prints came in lower than expected and it will be very interesting to see if this is echoed in the German data.
Focus for the remainder of the week will primarily be on the euro area inflation data for September on Tuesday and the US September Jobs Report on Friday. Ahead of the labour market report, September ISM manufacturing and services indices together with August JOLTs data will also be due for release. The Polish Central Bank announces its base rate on Wednesday. Moreover, in China the National Day holiday starts on Tuesday and lasts for seven days.
Economic and market news
What happened overnight
In China, the private sector Caixin PMI indices declined in September, with the manufacturing gauge falling to 49.3 (August: 50.4), and the services leg edging down to 50.3 (August: 51.6). The official PMIs from NBS were also released, with the manufacturing PMI improving slightly in September to 49.8 (August: 49.1) – the highest print in five months. The non-manufacturing index dropped to 50.0 from 50.3 in August, while the composite measure increased to 50.4 from 50.1. While the readings were generally to the soft side, indicating a challenged economy, we see upside risks to our growth estimate of 4.8% this year and next, given the massive stimulus measures announced last week.
What happened since Friday
In the US, the PCE price index in August stood at 2.2% y/y (0.1% m/m SA), while the core measure was to the soft side at 0.1% m/m SA (cons: 0.2% m/m). The seasonally adjusted monthly core services PCE inflation remained steady and close to June-July pace (0.23% m/m, from 0.24%). On an annual basis, core services inflation picked up slightly to 3.8% (from 3.7%), which is still somewhat above average pre-pandemic pace (circa 2.5%). The downside surprise was mostly driven by the core goods component (-0.17% m/m SA), where deflation has been observed for quite a while now. Overall, a non-dramatic reading, with a muted market reaction as well.
Revised data from the University of Michigan showed consumer sentiment rising to 70.1 in September from 67.9 in August. Inflation expectations were slightly mixed, with the 1-year outlook ticking down to 2.7% in September (August: 2.8%) and the 5-year gauge increasing to 3.1% (August: 3.0%).
In the euro area, both French and Spanish inflation data for September were weaker than expected. French HICP inflation fell to 1.5% y/y from 2.2% y/y in August (cons: 2.0%), driven by lower energy prices due to base effects and monthly declines. Momentum in French services inflation is softening somewhat, though the decline relates to the high prices increases in August due to the Olympics. Spanish HICP inflation declined to 1.7% y/y from 2.4% y/y in August (cons: 1.9%). The soft country readings support the ECB’s confidence in inflation returning to target.
In Norway, the seasonally adjusted NAV-unemployment rate rose to 2.1% in September, indicating that the labour market remains relatively tight despite some recent weakness in employment and unfilled vacancies. Retail sales for August grew 0.1% m/m but seem to be trending moderately downward after extreme summer volatility and a pick-up in real wage growth. We still expect private consumption to pick up going forward, but the figures at least show moderate risk of an immediate boom in consumption.
In Japan, Shigeru Ishiba won the LDP leadership election on his fifth attempt and will become Japan’s next prime minister. Some of his pledges include of cleaning up the ruling party, revitalising the economy and addressing security threats from powerful neighbours. On Sunday, Ishiba said that “monetary policy must remain accommodative as a trend given current economic conditions”, while noting that rate decisions rest with the Bank of Japan (BoJ), with which the government will cooperate. Ishiba has previously criticized the BoJ’s aggressive monetary easing.
In Middle East, Israel’s killing of Hezbollah leader Nasrallah marks a significant escalation in the ongoing conflict. For now, we think all the signals coming from Iran point towards them still being reluctant to escalate and we think that will be the case.
Equities: Global equities were higher on Friday, buoyed by a rally in Chinese stocks, while the US markets ended lower. Last week, global equities overall saw gains, with the Chinese markets experiencing their best week since 2008; a story in its own right. It was particularly interesting to see materials and consumer discretionary sectors outperforming, while defensives and minimum volatility categories struggled. The massive shift in focus last week from the US, services, AI, lower inflation, and softer monetary policy to a resurgence driven by the traditional Chinese property market growth inverted the familiar equity leadership we have observed for a couple of years.
As discussed last week, when markets become very stretched and oversold, and key fundamentals are changing, reversals can occur dramatically. This was evident last week and has continued this morning as policy measures are overshadowing the weak service and manufacturing Caixin PMI data. Chinese stocks are surging, with increases of 3-5%, continuing their ascent. Conversely, the rest of Asia is mostly lower, with Japanese stocks declining almost 5% following the surprising election of Shigeru Ishiba as new prime minister. US and European futures are very close to unchanged. However, it is clear that Europe is benefiting far more from the uplifted sentiment in China than the US.
FI: EUR rates fell across the curve on Friday morning, as French/Spanish inflation figures came out markedly softer than expected. Part of the initial move faded through the session, but EUR swap rates were nevertheless 5-6bp lower across tenors by the close. Markets now price in 20bp ahead of the October meeting, and we agree that the recent data (inflation/PMIs) have moved the balance of risk in favour of another 25bp. Hence, we have changed our ECB call, now expecting the ECB to cut in October and December, before resuming to quarterly cuts in 2025. Our new profile also includes a rate cut in December 2025, thus bringing the deposit rate to 2% then.
FX: Last week marked the 4th consecutive week of a weaker USD, although the second half of Friday’s session saw some support to the USD which closed the day unchanged. The yen had a strong session with USD/JPY declining four figures as Ishiba’s unexpected LDP presidency win is seen as hawkish for BoJ prospects. The NOK was as one of last week’s underperformers whereas the SEK found support broadly, with EUR/SEK trading below 11.30 and USD/SEK briefly touching new YTD lows below 10.05.
