Euro area inflation in focus as national data reveals muted core momentum

In focus today

• In the euro area, we receive the flash inflation data for August. National releases from France and Spain were broadly as expected in headline terms, while the German print came in slightly lower than expected. Importantly, underlying inflation pressures remained contained across the three countries: core inflation either declined or was unchanged with a continued muted momentum. This suggests that the energy price shock has not yet spilled over to underlying inflation. We therefore expect headline inflation to rise to 3.2% y/y, while core inflation should decline to 2.4% y/y.
• Also from the euro area, we get data on unemployment which is expected to stay at 6.3% and the final manufacturing PMI for August that is expected to confirm the flash release of 52.8.
• The US JOLTS report for July is released. Job openings have trended lower in recent months, with the June reading falling slightly more than expected to 7.36m. The Fed monitors job openings as a key labour market measure. ISM manufacturing PMI is also released.
• In Sweden, Manufacturing PMI is due. PMI readings have generally held up well this year, even during periods of turbulence. The figure eased slightly in July, but other indicators in Sweden have remained strong, and there is little reason to expect today's figures to deviate from the strong trend.
• Overnight, we expect the Reserve Bank of New Zealand to hike the Official Cash Rate by 25bp to 2.75%. Markets have fully priced in the move.

Economic and market news

What happened overnight

China's private RatingDog manufacturing PMI rose to 51.5 in August from 50.9 in July, beating expectations of a broadly unchanged reading. The improvement was driven by stronger output and new orders, with export business rising at the fastest pace in six months. The uptick follows a similar positive surprise in the official NBS measure yesterday and suggests that the Chinese economy could be experiencing more positive momentum after generally weak Q2 and July.

Japan's final S&P Global manufacturing PMI rose to 54.9 in August from 54.5 in July, slightly below the flash estimate of 55.1 but still marking the strongest reading since April and the eighth consecutive month of expansion. The improvement was driven by solid demand for semiconductors and AI-related products, with new business and export orders still rising at the fastest pace since January 2018. That said, Taiwan's manufacturing PMI moderated (54.7, July 55.1) after a strong rise earlier in the year, suggesting that the growth momentum in AI-related demand could be levelling off (even if the pace remains very strong).

What happened yesterday

In Japan, focus was on the 10-year government bond yield as it rose to 3% for the first time since 1996, following comments from US Treasury Secretary Scott Bessent suggesting the Bank of Japan should raise rates more aggressively. Bond yields were also on the rise globally, as rising oil and natural gas prices lifted inflation concerns - a move that continues this morning. Markets were already pricing a high likelihood of a 25bp hike to 1.25% at the September meeting, but the remarks added to the pressure with markets now pricing a rate hike by 70%. The currency remains under scrutiny after earlier joint intervention by authorities in Japan and the US, with USD/JPY rising back towards 160 after briefly touching 155 in the beginning of August.

In Germany, HICP inflation increased to 2.9% y/y in August (cons: 3.1%, prior: 2.8%), slightly below expectations. The details showed higher energy and core goods inflation, while services and food inflation declined, leaving core CPI unchanged at 2.4% y/y. Goods prices increased strongly for the second consecutive month, suggesting we are starting to see some indirect effects from higher energy prices, but services momentum remained very low at 0.15% m/m s.a. Overall, core inflation momentum is still contained at 2.5% 3m/3m SAAR, indicating that energy prices are not transmitting broadly to underlying inflation - similar to the picture in France and Spain last week.se mindre

Equities: Global equities started the week on a week footing declining 0.3%. While tech was virtually unchanged on the day, held up by semis, the rest of the sectors declined across the board except for Energy which benefitted on the higher oil and natural gas prices. Hence, even on an index level defensives declined, albeit marginally. S&P500 declined 0.3%, Nasdaq -0.1% and Russell2000 was down 0.5%. European equities were down 0.6%. With August now complete, tech and materials stand out as the main gainers through the month, where tech rose 5.5%, showing the resilience in the earnings driven rally, despite the continuous concerns about the duration of the AI build out case. Overnight, Asian markets are in red, with US and European futures virtually unchanged.

FI and FX: Global government bond yields continue to rise on the back of the recent statements from Fed and ECB officials as well as a renewed rise in the oil price and the solid supply in the primary market during August and the start of September. The move was driven from the long end as the 10Y US Treasury bond yield is close to 4.75%, and 10Y Bunds rose above 3.3%. The rise in bond yields has continued in Asian trading this morning, where 10Y JGBs is trading around the 3% level, which is the first time since 1996. In the primary market we have both covered bond and SSA deals as well as a regular tap auction from Germany in the 5Y segment.

In the currency market there was a modest rebound in the EURUSD, which is back above 1.16, while USDJPY moved below 160 after the strengthening of the dollar on the back Fed Chairman Warsh's speech on Friday at the conference at Jackson Hole.