In focus today
Today, focus is on euro area HICP inflation from September. We expect headline inflation to decline to 1.6% y/y from 2.2%, below consensus of a decline to 1.8%, due to the lower-than-expected prints from Spain and France. Energy inflation drives most of the downtick while core inflation should only decline to 2.7% y/y. The most important part of the print will be the monthly increases in services inflation, which remain high, but momentum is clearly coming down as per the released country data so far.
At 16.00 CET, both US ISM Manufacturing index for September and JOLTs job openings for August will be due for release. The flash manufacturing PMI released earlier signalled weakening demand amid declining new orders and rising inventories. Job openings are a key gauge of labour demand for the Fed, and any further declines would indicate a rising chance of a more pronounced uptick in unemployment rate. Overnight, Republican J. D. Vance and Democrat Tim Walz will face off in the US Vice Presidential debate.
At 09.30 CET, the Riksbank Minutes from last week’s meeting will be released. The minutes will be interesting given the somewhat mixed message regarding the next step. The rate path, the press conference, and the day-after analyst meeting at the Riksbank signalled a bias toward a 25bp rate cut. However, the press release clearly and explicitly opened the door for a 50bp rate cut.
Economic and market news
What happened yesterday
In the US, Fed Chair Jerome Powell stated that the Fed is in no rush to cut rates quickly, signalling two more 25bp rate cuts this year if the economy evolves as expected. Powell also emphasized that risks are two-sided and decisions will be made on a meeting-by-meeting basis. Atlanta Fed President Raphael Bostic indicated support for another 50bp rate cut in November if job growth slows faster than expected, but his baseline stance is for an “orderly” easing cycle over the next 15 months, bringing the policy rate to 3.00-3.25% by the end of 2025. We share a similar view, expecting rate cuts of 25bp at each meeting until June, with the policy rate reaching 3.00-3.25% by end-2025.
In the euro area, ECB president Christine Lagarde said that the ECB is becoming more optimistic that they can bring inflation down to the 2% target, which will be reflected at the next monetary policy meeting in October. At the same time, she also highlighted that September’s inflation data for the euro zone would be below the ECB’s baseline projections. We expect the ECB to deliver a rate cut of 25bp in October, bringing the deposit rate to 3.25% –
In Germany, CPI inflation for September was slightly below expectations, declining to 1.6% y/y from 1.9% y/y in August, while HICP fell to 1.8%, as expected. The downtick was primarily due to energy inflation, while the core measure also edged lower to 2.65% y/y from 2.75% y/y. The important services inflation declined to 3.79% y/y from 3.87% y/y on the back of a monthly rise of around 0.25% m/m s.a. While the yearly growth rate remains high, momentum is now cooling when looking at different measures.
In Switzerland, as expected, the SNB largely remained sidelined with FX intervention selling just 103mn CHF in Q2 2024 down from 281m in Q1. We have repeatedly highlighted that the SNB will commence on FX intervention as the policy rate nears zero. We anticipate intervention later this year if the CHF continues to strengthen in real trade-weighted terms. This week’s focus is on Swiss inflation data for September, due Thursday, where monthly pressures are set to ease even further. We expect a final 25bp cut in December from the SNB, bringing the policy rate to 0.75%.
Equities: Global equities were lower yesterday amidst a highly mixed global setting. Chinese markets continued their ascent, bolstered by broad policy support. In contrast, Japan experienced a sharp decline following the election of the new Prime Minister. European markets also dipped, an occurrence that raises questions about whether this was due to or despite very low inflation figures. In the US, markets moved higher following comments from Powell indicating that the Federal Reserve is not in a rush to cut rates. Sector performance was as mixed as the regional outcomes, albeit with a slight inclination towards defensive outperformance.
In the US yesterday, the Dow closed up by +0.04%, the S&P 500 by +0.4%, the Nasdaq by +0.4%, and the Russell 2000 by +0.2%. China has commenced their Golden Week holiday today; consequently, there was no significant market activity this morning. South Korea is also closed today, and their PMIs will not be published until tomorrow. Japanese equities are catching up this morning after the big underperformance yesterday. European futures are positive, while US futures are showing a mixed performance this morning.
FI: US bond yields rose modestly on the back of slightly hawkish comments from Fed Chairman Powell. Hence, 2yr Treasuries rose almost 10bp yesterday, while 10Y Treasuries rose 3bp yesterday.
FX: US yields rose as Powell pointed to two more 25bp cuts this year, contingent on the US economy performing as expected. The greenback found support in rising yields, but EUR/USD remains in the 1.11-1.12 range. Scandies traded on the backfoot and the same goes for CHF, with EUR/CHF breaking back above 0.94.
