An eventful week ahead

In focus today

 In the euro area, we receive the Sentix investor confidence indicator, which is the first indicator of investor sentiment in September.

Overnight, Chinese trade data for August is released. While exports recovered during H1, momentum has faded due to a weaker global manufacturing sector. Hence, one of China's few growth drivers in H1 is losing speed again leaving few engines of growth apart from stimulus-driven investments.

The remainder of the week will be eventful. Kamala Harris and Donald Trump will have their first debate Tuesday evening (US time), while US August CPI is due on Wednesday. On Thursday, the ECB will hold their September meeting, and Swedish CPI is released in the morning.

Economic and market news

What happened overnight

In China, August inflation data showed CPI at 0.6% y/y, somewhat below expectations of 0.7% amid higher food prices due to weather disruptions. Core inflation fell to 0.3% in August from 0.4% in July, indicating weak demand. PPI was lower than expected at -1.8% y/y (cons: -1.4%) - largely due to lower commodity prices. Overall, the readings highlight how China is a disinflationary force for global inflation. 

In Japan, Q2 GDP growth was revised down to 2.9% annualised from 3.1%, corresponding to 0.7% q/q SA from 0.8%. The adjustments were driven by lower corporate and personal spending.

What happened since Friday

In the US, nonfarm payrolls were lower than expected at 142k (cons: 160k), while the two prior months were revised down by 86k. The unemployment rate ticked somewhat lower to 4.2%, and wage growth was slightly higher than expected at 0.4% m/m SA (3.8% y/y). Overall, the August Jobs Report corroborated the gradual easing trend seen in labour markets. After the release, NY Fed President Williams acknowledged that it is time to cut rates, while Fed Governor Waller stated that he could support consecutive cuts or even larger ones if the data warrants it. Chicago Fed President Goolsbee, who has advocated for rate cuts for months, emphasized a data-driven approach to policy decisions. While we expect a 25bp rate cut in September, markets are currently pricing in a 33bp cut.

In the euro area, the ECB's preferred wage tracker, compensation per employee, declined to 4.33% y/y in Q2 from 4.76% y/y in Q1 - lower than the staff projections from June, which estimated an increase to 5.1%. Hence, the reading is good news for the ECB, reflecting abating underlying price pressure. That said, the level remains high, while more timely indicators also showed an uptick in July. As such, we project the ECB to remain cautious on the outlook. For the meeting on Thursday, we expect a 25bp rate cut, followed by quarterly rate cuts until Q3 2025.

In Germany, industrial production declined 2.4% m/m SA (-5.3% y/y) in July after rising 1.7% in June, reaching the lowest level since Covid. The German economy clearly remains the weak spot of the euro area, and we expect the economy to grow just marginally in the coming quarters. Given the large industry, the economy has been particularly hit by rising interest rates, energy prices and lower global trade in the past years.

In France¸ the Finance Ministry has requested an extension from the European Commission beyond the September 20 deadline to align its deficit reduction plan with Paris' 2025 draft budget. Worsening finances have led to EU disciplinary proceedings, leaving incoming Prime Minister Michel Barnier under pressure as he is set to form a government and draft a budget by October 1, under the threat of a no-confidence vote.

Equities: Global equities were lower on Friday and significantly declined over the last week, primarily focusing on the US job market and updated recession probabilities. The developments on Friday closely matched last week's insights. Consequently, there was a widespread move away from risk across various asset classes, with gold being an exception. Last week, global equities fell by almost 4%, with cyclical sectors underperforming defensive ones by nearly 3%. VIX increased from 16 to 22, minimum volatility outstripped momentum by 8%, and the tech sector dropping more than 7% while utilities and consumer staples ended slightly higher. In the US on Friday: Dow -1.0%, S&P 500 -1.7%, Nasdaq -2.6%, and Russell 2000 -1.9%. Asian markets are broadly lower this morning, while US and European equities are higher.

FI: Global bonds rallied on Friday following the US jobs report, which came in to the soft side in terms of job creation and revisions. However, the initial reaction quickly faded, as neither Williams nor Waller provided any clear guidance on the outlook for the September decision following the release. This week's CPI data may play a crucial role in determining whether the Fed opts for a 25bp or 50bp rate adjustment. The 2s10s UST curve bull-steepened some 8bp through the session, as the 2Y yield declined by 10bp. Markets are currently pricing in a 33bp cut for the upcoming September FOMC meeting, and the anticipation of rate cuts by year-end has increased by 9bp to 119bp following the NFP data. Additionally, rate cut expectations for the ECB have also risen, now projected at 175bp by the end of 2025, up from 166bp at the close on Thursday.

FX: The end to last week saw cyclically sensitive currencies come under pressure as post non-farm markets volatility entailed risk trading heavy and energy prices move lower. Especially NOK had a poor end to the week with EUR/NOK moving 10 figures higher back close to 11.90; also EUR/SEK moved 6 figures higher. EUR/USD did remarkably little while the JPY gained on the broader cross asset moves.