Inflation Friday

Market movers today

In the euro area, we get the preliminary August HICP figures today. This will be the last inflation input before the ECB meeting on 12 September, hence setting the scene for the monetary stimulus package. In July, headline inflation fell to a three-year low of 1.0% y/y, while core inflation stood at 0.9% – just below the 1.0% level it has hovered around for the past five years. Energy prices have fallen substantially since August and hence we expect both headline and core inflation to print at 0.9% in August.

After a cacophony of Fed speakers last week, US inflation data will be in focus today with the PCE figures for July due out. We expect PCE core rose +0.2% m/m in July, implying an unchanged PCE core inflation rate at 1.6%.

In the Scandi countries, we are looking forward to Danish Q2 GDP figures and Norwegian unemployment data for August (see next page).

Selected market news

Markets took courage from indications that China would not immediately retaliate against the latest US tariff increase announced by President Trump last week. Next focus reverts to whether negations planned for September will still take place. Asian equities extended Wall Street’s rally this morning, also supported by better than expected Japanese industrial production figures that reversed June’s sharp decline in factory output.

Incoming ECB President Christine Lagarde signalled policy continuity. Mirroring the official ECB communication, Lagarde said the institution has the tools to tackle a downturn and has not yet hit the lower bound on interest rates. Quite a different message came from ECB Governing Council member Klaas Knot who argued against a package of easing measures including a restart of QE. The comments are not that surprising given he is the most hawkish ECB member. With two weeks to go before the ECB meets, the market remains priced for significant easing from the ECB.

The Brexit situation remains fluid. Boris Johnson’s suspension of the UK parliament will get an early test on Friday when two courts could rule on challenges from Brexit opponents. In light of the recent events, we have changed our call and our base case now is that a small majority in the House of Commons will eventually bring the Johnson government down, form a temporary government, ask the EU 27 for an extension and call for election when the extension is granted (40%). However, we stress that uncertainty is high and the risk of a no-deal Brexit has increased in the past days in our view (30%). For more details see Brexit Monitor: More complicated, not impossible, to block no-deal Brexit, 29 August.

Italy’s President Matarella tasked Prime Minister Conte to form a new governing coalition between the Five Star Movement and the centre-left Democratic party. The deal reduces the risk of another budget clash with Brussels over the 2020 budget and rating downgrades. Italian yields cheered the avoidance of snap elections with the 10Y yield breaking below 1% for the first time ever. A final hurdle still needs to be cleared by getting support for the tie-up amid Five Star members in an online vote.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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