In focus today
We will have a quiet start to the week on the data front. The most important release today is the German Ifo index. Consensus expectations is for a small decline, which in that case would be the fifth consecutive month that would have happened. This would be in line with the PMI index, which declined in August, as we saw last week.
The Riksbank minutes from the August meeting will be released at 9.30 CET. The meeting itself proved rather uneventful for markets, with a fully expected rate cut from 3.50% to 3.25% and signals of more to come. We will look to see whether any participants discussed the possibility of larger 50bp cuts and what the prerequisites would be for such a move.
Overnight on Tuesday, China will release industrial profits for July. They increased 3.6% y/y in June, but PMI data suggests the economy lost momentum in July and we could see profit growth slip into negative again.
The highlight of the week will be the batch of inflation data due on Friday, when we will get flash inflation from the euro area, PCE inflation from the US and Tokyo inflation from Japan.
Economic and market news
What happened overnight
In China, the People’s Bank of China (PBoC) kept its one-year medium-term lending facility rate unchanged at 2.30% as widely expected, as it was lowered last month. We expect the PBoC to lower the rate further over the next couple of months as the economy needs more stimulus and the recent yuan appreciation provides more policy space to lower rates.
What happened over the weekend
In Middle East, tensions rose once again after a missile exchange between Israel and Hezbollah on Sunday. Hezbollah said its bombardment was a retaliation for Israel’s killing of one of its most senior commanders last month in Beirut. The timing of Hezbollah’s attack was surprising considering that Gaza ceasefire negotiations are ongoing. Iran, whose leaders have vowed a revenge for the assassination of Hamas leader, Ismail Haniyeh on its territory in early August, has earlier said they would delay their response and allow time for peace talks. The next question is if the recent developments jeopardize the talks and change the calculus of Iran.
What happened on Friday
In the US, Fed chair Powell gave a clear signal that he is ready to start cutting interest rates already in September. He said that upside risk to inflation has diminished, while downward risk to the labour market has increased. Yields on 2Y and 10Y US-treasuries dropped around 8 and 5 bp, respectively during Friday’s session. USD weakened with EUR/USD up around 0.6% on Friday, briefly rising above the 1.12 mark. USD/JPY is now around the lowest point in 2024 and testing the level from 5 August, which was the lowest in 2024.
We changed our ECB call, meaning that now we expect ECB to cut policy rates at the upcoming ECB meeting on 12 September, in line with consensus and market pricing. The reason for the change is not due to baseline projection of the euro area inflation path, but the weak growth development and the labour market through the summer have changed the probability distribution in our view around the inflation path towards the policy-relevant horizon, see Reading the Markets EUR – The new issuance season has begun. We pencil in a September 24 rate cut from the ECB, 23 August.
Market movements
Equities: Global equities were higher on Friday and showed gains last week. Like this week, the past week was loaded with significant events in the latter half, including PMI data and Powell’s speech at Jackson Hole on Friday. Although Powell did not introduce any new economic policies, he confidently declared that the economy has achieved a soft landing, signalling a time for policy adjustment. Investors embraced this message of a soft landing, driving shares higher, particularly in cyclical sectors and notably in small caps. Should this soft-landing scenario persist for an extended period, we believe there is substantial potential for continued outperformance in small-cap stocks. In the US, the indices showed the following movements: Dow +1.1%, S&P 500 +1.2%, Nasdaq +1.5%, Russell 2000 +3.2%. Asian markets are presenting a mixed picture this morning, with Japanese stocks notably underperforming. Both US and European futures are trending lower today.
FI: Global yields ended a smidgen lower on Friday, after a choppy session, especially in the afternoon around Powell’s speech in Jackson hole. While Powell did not give guidance on the size of the upcoming rate cut(s), his key message was that ‘The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks’ 2y treasuries dropped 8bp on the speech to trade at 3.92%, while the 10y ended about 5bp lower at 3.80%.
FX: The end to last week saw the USD sell-off on Powel’’s rate-cut preparedness which brought EUR/USD back close to the 1.12 mark. Also risk-sensitive currencies in the likes of ZAR, AUD, NZD and NOK all rallied as we headed into the weekend. Noteworthy, SEK was relatively immune to the big moves in broader cross asset markets. Overnight it has been relatively quiet although the opening has seen some of the safe havens like CHF gain modestly.
