Euro area inflation steady at ECB's 2% target

In focus today

• In the US, today's main data focus will be on July JOLTs labour turnover report. The number of job openings is a key measure of labour demand for the Fed. 
• In Sweden, we get services and composite PMI. They both fell in July, driven by services PMI which had a strong and broad setback. All components fell, but especially employment, which had the lowest reading since March 2020.
• In the euro area, we receive final services and composite PMI, and with much of Europe on holiday in August, late responses not captured in the preliminary release could influence the final print.
• In Poland, the central bank (NBP) will announce their rate decision, we expect them to cut the policy rate by 25bp bringing it to 4.75%.

Economic and market news

What happened overnight

This morning, we published our Nordic Outlook with updated economic forecasts for the major economies and the Nordic countries. For the Nordics, we take note of the disappointing data we have received from Sweden and adjust down the outlook for both growth and for the Riksbank policy rate, where we now expect an additional cut this year. We lower the growth forecast for Denmark for 2025 by 1.4 percentage points, primarily reflecting large revisions to historical data. Growth in Norway, on the other hand, is revised up, and since it is driven by higher productivity growth it still leaves room for gradual rate cuts. For the major economies, we have only smaller adjustments, most notably an upwards revision of euro area growth in 2025. We have not seen much weakening of the economies following the US tariff hikes, which means that downside risk has decreased. Read more in Nordic Outlook - Caution, not crisis, 3 September.

What happened yesterday

In the euro area, HICP inflation rose to 2.1% y/y in August, up from 2.0% y/y in July, with core inflation at 2.3% y/y, above expectations of 2.2% y/y. This marks the fourth consecutive month that inflation has aligned with the ECB's target. Monthly trends remain consistent with what we have seen the past months. Services inflation stays elevated at around 3% y/y, while energy prices decline and goods price increases remain minimal. We expect inflation to average 2.1% y/y in Q4 before falling below target to 1.8% y/y in 2026.

In the US, ISM manufacturing rose to 48.7 in August from 48.0 in July, below expectations and PMI predictions. Sub-indices show promise, with modest declines in prices, a slight rise in the employment index, and improvements in new orders and order-inventory balances, hinting at future production growth. Meanwhile, manufacturing PMI climbed to 53.0 in August, the strongest improvement in operating conditions since May 2022, driven by a surge in production and solid growth in new order books. Despite the positive trends, the USD weakened slightly following the ISM release.

In the UK, PM Starmer did a backroom reshuffle in his Downing Street team and Treasury related roles ahead of the important Autumn Budget, a move that has the potential to sideline Chancellor Reeves, who represents the more responsible fiscal line within the Labour party. This move triggered a spike in 30Y Gilt yields which at one point traded at the highest level since 1998, although the increase was driven by a global move for higher yields as well. Regardless, the increase in borrowing costs worsens the position for the Labour government.

Equities: Global equities suffered yesterday, taking their cues from the long end of the yield curve again. Amid massive issuance volume in European debt markets (largely due to substantial deals in Italy and the UK alongside corporate issuance) and concerns over the UK fiscal path, risk sentiment deteriorated. This left Dow Jones -0.6%, S&P500 -0.7% and Nasdaq down -0.8%. In Europe, the Stoxx 600 ended 1.5% lower. The same pattern continued in the Asian session this morning with equities lower and long end Japanese yields higher.

Given the sour risk sentiment, with lower equities, higher bond yields and a VIX spike (now trading around 17), it came as no surprise that defensive sectors outperformed cyclicals. Only consumer staples, health care and energy managed to post gains. Unsurprisingly, the rate-sensitive sectors - tech, real estate and industrials - were the worst performing.

FI and FX: GBP and the UK bond market came under significant pressure yesterday as a surprise cabinet reshuffle sent worries over UK fiscal sustainability to new highs. EUR/USD dropped firmly below 1.17 as the dollar caught a bid in a broad risk-off environment. We have updated our Riksbank call and now expect a 25bp cut in November against our previous view of unchanged interest rates.