US inflation pressure eases

Market movers today

The US Empire index is the first regional survey for September. It showed a big drop in August but came from a very high level. Consensus is a broadly flat number. Industrial production for the US is also released today and expected to show a decent gain of 0.5% m/m. US import prices may also get some attention given the high focus on inflation.

The euro area releases industrial production as well as labour costs. It will be interesting to see if wage gains also pick up in the euro area as labour shortages are also a challenge here. European Commission President von der Leyen will hold her annual State of the Union speech at 9:00 CEST, where green transition efforts will again be in focus.

Sweden releases Prospera inflation expectations (see below).

The 60 second overview

US CPI inflation surprised on the downside yesterday with CPI core at +0.1% m/m as used cars and public airline fares declined, the latter likely driven by the Delta variant of the coronavirus. US treasury yields dropped 6 bps to the levels we saw two weeks ago and EUR/USD increased but later corrected for the entire gain. Wall Street received the news positively opening in green an hour later as the risk of Fed hikes due to high inflation subsided.

New paper on stagflation: Despite the lower US inflation figures yesterday, we do see a rising risk of a stagflationary scenario for the global economy, in which growth slows down more than expected while underlying inflation pressures from stronger wage growth moves higher. This morning we sent out the paper Research Global - Stagflation' risks on the rise, 15 September, outlining why we could be in for a longer period of labour shortages and supply chain disruptions - and what it implies for growth, inflation and central banks.

Data out of China disappointed this morning as industrial production slowed to 5.3% in August from 6.4% in July and retail sales slowed to 2.5% from 8.5% in July. Particularly the latter falling way short of expectations and adding pressure on Chinese policymakers.

Equities: Equities in a bit of a roller coaster ride yesterday. Conflicting economic signals challenges investors but at the end of the day, US equities closed near day low with all sectors lower. Growth reversed yesterday's underperformance and small cap underperformed large cap. Healthcare, tech fared best. Despite fading risk appetite the VIX index stayed close to the 19-level where it started the day. In the US, Dow -0.8%, S&P 500 -0.6%, Nasdaq -0.5% and Russell 2000 -1.4%. News from Asia this morning rather downbeat but most markets are holding up quite well. European and US futures showing small gains.

FI: Bond yields declined on the back of weaker than expected US CPI data for August. The m/m rise in US CPI-data both headline and especially core-CPI was lower than expected and bond yields declined although the y/y CPI-data is still very high. However, yesterday's CPI-data was supportive for those believing that spike in inflation is temporary.

FX: Spot dollar will remain highly driven by equity markets in the very near term. USD/JPY followed US yields lower yesterday on the back of the CPI figures with the cross dropping from 110.1 to the 109.6 level. We still see risks to the upside for EUR/SEK, even after yesterday's inflation surprise.

Credit: Credit markets performed well yesterday where iTraxx Xover tightened almost 2bp (to 225.8bp) and Main 0.3bp (to 44.4bp). HY bonds tightened 1bp and IG was unchanged.

Nordic macro

In Sweden, Prospera releases the "big" (quarterly) inflation expectations survey. Throughout the summer months, money market 1-2-year CPIF expectations have levelled off at 1.7% while 5-year expectations rose to 1.8% in August (highest since early 2019). Although yesterday's positive inflation surprise came too late for this to affect the survey outcome, it seems reasonable to expect the broader survey to show a similar development.