Brace for Impact, it is NFP-Week

In focus today

Today will be quiet on the macro front, with US markets closed for Labor Day.

In Sweden, PMIs are due 8.30 CET. Like trends observed in many other countries, the manufacturing sector appears to be the weaker segment. The NIER survey, released last week, indicated that business sentiment in August remained nearly unchanged from July. It seems likely that PMIs will reflect a similar trend.

The most important release this week will be the US August Jobs Report on Friday. Ahead of the release, August ISM manufacturing and services indices together with July JOLTs data will also be due for release. Moreover, the Polish Central Bank and Bank of Canada will begin the September central bank meetings on Wednesday. We pencil in an unchanged decision in Poland at 5.75%, and a rate cut of 25bp in Canada, bringing the key rate to 4.25%. In the euro area, ECB’s key measure of wage growth, “compensation per employee”, is due for release on Friday. Finally, we publish Nordic Outlook with updated economic forecasts on Tuesday.

Economic and market news

What happened overnight

In China, the private manufacturing PMI from Caixin climbed back into growth territory, beating expectations with a reading at 50.4 (cons: 50.0). The uptick was driven by both stronger new orders and production. This contrasts with the NBS’ official manufacturing PMI, released on Saturday, which showed the soft trend in manufacturing continuing (49.1, cons. 49.5). NBS’ non-manufacturing counterpart was stronger than expected at 50.3. The market reaction was limited. Mainland China’s CSI 300 benchmark has declined some 1.3% in early Monday trading.

What happened since Friday

In the US, the PCE inflation data, the Fed’s preferred inflation indicator, was released. On a monthly basis, core inflation was as expected at 0.2% m/m SA, while the yearly figure was slightly weaker than expected at 2.6% y/y. The revised August University of Michigan sentiment survey showed that consumers’ short-term inflation expectations declined to the lowest level since December 2020 (2.8%), while 5y expectations stood unchanged at 3.0%. The market reaction was muted, as the Fed is now focusing more on labour market data for its rate decisions.

In the euro area, headline inflation dropped to a 3y low of 2.2% y/y in August, primarily due to negative base effects in energy prices. However, underlying price pressure remained sticky as core inflation was virtually unchanged at 2.84% y/y, driven by still elevated services inflation. Coupling this with normalization of core goods prices, we project core inflation to remain sticky going forward, reaching the 2% target only in H2.

The unemployment rate edged lower to its all-time low at 6.4% in July (prior: 6.5%) as the number of unemployed people decreased by 110k. Hence, labour demand in the euro area remains high, keeping wage growth elevated, which also could fuel sticky services inflation given weak productivity in Europe.

In Norway, the final registered labour market report before the Norges Bank (NB) meeting in September showed a surprising decline in the seasonally adjusted unemployment rate to 2.0%. This comes after several months of labour market data generally printing to the weak side of NB’s expectations. Hence, the print reduces the likelihood of a rate cut from NB this year. Additionally, NB announced an unchanged NOK FX selling pace in line with expectations.

In commodities space, six OPEC+ sources informed Reuters that the cartel will proceed with its planned oil output hike in October. While some analysts had doubted the hike would happen amid sluggish demand growth, particularly in China, the decision is supported by the Libyan outage tightening the market and hopes of a Fed rate cut in September. Additionally, two sources advised that future output increases will be decided on a month-by-month basis. On Friday, oil prices closed at USD78.80/bbl.

FI: Global yields rose 4bp on the day (with 10y German Bunds rising to 2.30%), taking the cues from hawkish ECB speak (and carry over from Thursday’s US GDP figure) rather than the euro area flash inflation print for August. ECB’s Schnabel gave fuel to the sell as she was on the hawkish side, yet her argumentation also included an openness to a rate cut in September. Overall, we see her supporting a gradual and cautious approach to a potential rate cutting cycle, for example 25bp per quarter, yet still running a restrictive monetary policy, and not communicating a rate cut path. Markets are pricing 63bp of rate cuts by year end and 97bp through 2025.

FX: The USD finished the week of on a strong note with EUR/USD declining firmly below the 1.11 mark on the back of stronger US data. The key release this week will be the US jobs report out on Friday. A late Friday sell-off in Norwegian kroner completely shifted the weekly performance of NOK from one of the top performers to one of the clear underperformers.