ECB Day Ahead

Market movers today

The ECB meeting is the main event today, with the rate decision at 14.15 CET followed by Lagarde’s press conference at 14.45 CET. We expect a 25bp hike, which will be mirrored 1-to-1 by Danmarks Nationalbank.

On the data front, August inflation data will be released for Sweden. We expect headline CPIF inflation to cool clearly in y/y terms to 4.9% (from 6.4%) and CPIF excluding energy to 7.3% (from 8.0%).

From the US, August PPI and retail sales data are due for release. While headline retail sales have been supported by higher gasoline prices, early spending data suggests that control group sales growth have weakened sharply from July.

Overnight, data on China’s August retail sales, industrial production and fixed investments growth will be released, consensus is looking for modest improvement after weak summer prints.

The 60 second overview

We expect the ECB to hike by 25bp at today’s meeting. The market pricing is 16bp (up 3bp since yesterday) following the Reuters story on an upward revision to the 2024 inflation forecast in today’s staff projections. In our opinion, this is a natural (and expected) consequence of rising energy prices since the latest projection round in June. The key factor for today’s decision will be the projected core inflation path until 2025. We expect the forecast to reflect strong underlying inflation dynamics driven by tight labour market conditions. Combined with the latest (strong) inflation data, this should justify hiking a final 25bp. We also expect an advancement of the end to full reinvestment process of PEPP currently guided for December 2024 to be on the cards. Regardless of whether the ECB decides to hike or not, we expect Danmarks Nationalbank to follow the rate decision 1-to-1.

The US August Core CPI surprised to the upside at +0.3% m/m (forecast +0.2%, July +0.2%), while headline CPI was lifted by higher oil prices largely as expected (+0.6%; July +0.2%). The uptick was driven by faster services inflation, where especially airfares’ contribution rose sharply. But even so, underlying price pressures seem to have remained slightly higher than anticipated in early Q3. Reflecting this, Atlanta Fed’s Sticky CPI growth picked up to 4.7% m/m AR, up from June low of 2.9% yet still clearly below September peak of 8.2%. Core goods prices were largely unchanged, while shelter contribution continued to moderate reflecting delayed pass-through of past easing in rent growth. While the Fed is not happy to see a pick-up in the key core services components, markets were not spooked by the release, as short-dated UST yields declined after the release. The Fed is still very likely to stay on hold next week, but focus remains on the November/December meetings, where markets see the probability of another rate hike essentially as a coin-flip. Read more about our latest inflation views from our monthly Global Inflation Watch – Underlying price pressures remain sticky, 13 September.

Euro area industrial production declined 1.1% m/m in July (cons: -0.9%). The decline was driven by Germany, Italy and Spain while French production rose in July. The euro area industry has suffered the entire year and the recent business surveys suggest that this should continue in the coming months. Especially the outlook for Germany looks weak given the large decline in factory orders we saw in July. This is especially evident in the auto sector, where new orders are down by 20% since the turn of the year. Apart from declining demand in general, the increasing competition from Chinese producers is a headache for the European car producers. Yesterday, the European Commission launched an investigation into Chinese electric vehicles, which according to President von der Leyen is ‘distorting our market’ due to ‘huge state subsidies’.

Equities: Back and forth leads no way for equities. That’s how is has felt this week where equities have mostly been reversing the moves from the day prior. Hence, yesterday it was equities higher driven by cyclical growth while energy was lower. However, we got a much bigger common top-down driver yesterday with the US CPI number. After thinking twice, or getting through the sub-components, investors decided this was a good CPI report with signs of further slowing in core inflation. As expected, this resulted in the relief risk-on move benefiting the tech and growth universe the most while inflation winner, materials and energy lagged. In the US yesterday Dow -0.2%, S&P 500 +0.1%, Nasdaq +0.3% and Russell 2000 -0.8%. The risk-on tone is continuing in Asia this morning lead by Japanese stocks. US and European futures are higher as well while keys for the equity market have been handed over to ECB.

FI: European government bond yields rose significantly yesterday morning on the back of the Reuters story claiming that the ECB will revise up its inflation forecast for 2024 in the new staff projections. Money markets are pricing in 16bp ahead of today’s ECB meeting, up 6bp since Monday. 2Y Bund yields rose by 5bp, while the long end was little changed. The 10Y Italian yield spread to Germany widened by 4bp throughout the session. In the US, Treasury yields fell 4-5bp across the curve despite the strong US core CPI print.

FX: EUR/USD declined below 1.0750 on strong US CPI and risk-off sentiment. USD/JPY climbed slightly higher to around the 147.5 mark. EUR/GBP fell below 0.86 after initially moving higher on weaker-than-expected UK GDP. EUR/SEK edged a bit higher to around 11.95, while EUR/NOK is around 11.50.

Credit: Yesterday, credit markets were positive following the US CPI announcement with iTraxx Main going 1.1bp tighter to 70.3bp while Xover tightened by 5.4bp to 393.7bp. In addition, primary market activity is still going, however a slower pace is observed.

Nordic macro

August inflation for Sweden is expected to show a significant drop in general, CPIF slowing by 1.5 p.p. to 4.9 % y/y while CPIF excl. Energy slows by 0.7 p.p to 7.3 % y/y. The latter is still 0.4 p.p. above Riksbank’s forecast, however. As for detail, we expect clothing, car fuel, hotel/restaurants and “other goods and services” to add 0.4 p.p. to the monthly CPIF rate while transportation services and recreation is likely to subtract the same amount. Looking at details from Norway and Denmark earlier this week, risks are seemingly tilted to the downside vs our Swedish forecast.

In Norway, economic growth levelled off in H1, and we expect Norges Bank’s regional survey (out this morning) to show this trend continuing into H2. We expect aggregate output growth to come out around 0.1-0.2% for the next quarter. Given the strong pressures in the economy and on wages and prices, it will perhaps be equally important to see whether capacity utilisation continues to decline and whether labour shortages are becoming less precarious.