Asian stocks held steady this morning

Market movers today

• In the US, CPI inflation for August will attract more attention than usual given that they will give the Fed its last impression of underlying price pressure before the FOMC meeting on 19-20 September. Out of the past five months, CPI headline has fallen in three and the weak numbers seem to be very broad based. In August, we estimate energy contributed around 0.1pp to the headline figure on top of our expectation of an increase in core CPI of 0.1% m/m. Thus, we estimate CPI headline to come in at 0.2% m/m (1.7% y/y, unchanged from July) and CPI core at 0.1% m/m (1.5% y/y vs 1.7% in July). Note that the fall in CPI core y/y is driven by an increase of 0.3% m/m in August last year, which falls out of the yearly increase in August this year.

• In the UK, the Bank of England (BoE) meeting will be in focus. We expect BOE to keep the Bank Rate unchanged at 0.25% with an unchanged vote count of 7-2. It is one of the small meetings without an updated Inflation Report and a press conference, so we have to look for any changes to the policy stance in the minutes. It is not our expectation that the BoE will change its tone significantly, as the economy has developed more or less in line with the expectations set out in the latest Inflation Report of 3 August but the BoE may address the weaker GBP. We still expect the bank to remain on hold throughout the Brexit negotiations, which is also what markets have priced in.

Selected market news

Asian stocks held steady this morning, despite weaker-than-expected Chinese industrial output (6.0% y/y in August) and investment (7.8% YTD) data released this morning. Wall Street edged up to a record high yesterday, while US Treasury yields climbed to 2-1/2-week highs on an ongoing improvement in broader investor risk sentiment.

In his annual State of the European Union speech, Commission chief Juncker sketched out a vision of a post-2019 EU where ideally all member countries should adopt the euro at some point, with a eurozone finance minister to co-ordinate economic policy across the bloc. However, he also rejected French proposals of a special eurozone budget, as there are other measures available to help counter economic shocks. The French president Macron will present his ideas for reforming the eurozone on 26 September, two days after the German election. German politicians, including Angela Merkel, has recently voiced support for such reforms, but much will depend on the actual German government composition, which will probably only be known in end-October/mid-November (see also German Election Monitor No. 1: Next euro area election unlikely to rock the boat, 29 August).

In the US, we got news that Republicans leaders expected to release more details on tax reform on 25 September. The hope is to complete a budget by mid-October carrying tax language, which then needs to pass Congress, see POLITICO. The difficulty remains that Republicans must not only agree on taxes, but also need to agree on a budget to make changes to tax legislation without being filibustered in Senate. Although Trump has begun talking more with Democrats lately, it seems unlikely the Republican leaders want to do a tax reform with the Democrats, in our view.

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