EUR/SEK dropped yesterday on the Riksbank and ECB

Market Movers

• Focus will be on the US labour market report for August where we look for stillsolid employment growth of 205,000. The Conference Board’s measure of the labour market (jobs plentiful less jobs hard to get) increased to a new cycle high in August, which is an encouraging sign. However, taking a broader set of labour market indicators into account, we estimate that job growth slowed to 205,000 in August, from a growth rate of 235,000 on average over the past three months. We estimate that the unemployment rate declined one notch to 5.2% – not far from the FOMC’s NAIRU estimate of 5.0%.

• Comments from Fed members generally attract attention and today Fed’s Lacker, who is a voter and considered hawkish, speaks. However, his comments will be given ahead of the release of the job market report, which makes them less interesting.

• In the euro area German factory orders are due for release this morning. They rebounded in Q2 due to stronger foreign orders, while domestic orders have been the weak link. The latest uncertainty about China has increased the risk of a continued cautious stance among businesses and, although the weakness will not be reflected in the figure for July, focus will be on whether there will be an impact on sentiment in the figures for coming months.

• EUR/SEK dropped yesterday on the Riksbank and ECB. See Scandi markets, page 2.

Selected Market News

ECB president Mario Draghi was very dovish at yesterday’s meeting and we now expect the ECB to extend QE purchases beyond September 2016 (see ECB will continue its QE purchases beyond September).

Our changed expectation comes mainly from the fact that the ECB now projects headline inflation to be only around 0.9% in Q2 16 and 1.2% in Q3 16 when the ECB is set to end QE purchases. In our view, the ECB will continue its purchases if inflation is around these levels and we continue to believe that the ECB is too optimistic on its outlook for core inflation, as slack in the labour market will still be a headwind to higher wage growth in 2016.

European equities and government bonds rallied with the EuroStoxx 50 up by more than 2% and the 10-year German government yield falling 6bp from Wednesday’s close. The EUR weakened against most currencies and EUR/USD is trading one big figure lower just above 1.11.

The positive sentiment has not carried over to Asian trading, however, with most of the key equity indices down almost 2% this morning. This marks the sixth straight week of losses in Asian equities and the MSCI Asia Pacific index is now down 20% from its April high. Chinese markets remain closed until Monday.