Euro area labour market figures kick off eventful week

In focus today

• In the euro area, attention shifts to August unemployment data. While the labour market has remained robust with low unemployment, employment growth has moderated lately. We expect the unemployment rate to remain unchanged at 6.2%. Additionally, the final manufacturing PMI is due today. With much of Europe on holiday in August, late responses not captured in the preliminary release could influence the final print. This is particularly important as the flash estimate surprised significantly on the upside.
• This week offers plenty of key data, including euro area inflation on Tuesday, Sweden's flash inflation figures on Thursday, which will be closely watched and key to near-term Riksbank rate decisions. The week concludes with the US jobs report on Friday.

Economic and market news

What happened overnight and over the weekend

In China, PMIs for August released this morning and yesterday highlight ongoing economic softness. Official PMI manufacturing rose slightly to 49.4, while RatingDog PMI (formerly Caixin PMI) edged up to 50.3. While better than expected, weakness persists in construction and employment indices, underscoring the need for stronger stimulus targeting housing and consumption. The price indices were the main bright spot suggesting easing deflationary pressures as output price indices improved.

In the US, an appeals court ruled IEEPA tariffs illegal but allowed them to remain until 14 October, giving the Supreme Court time to intervene. The Trump administration has prepared a backup plan to replace IEEPA tariffs with broader sectoral tariffs, similar to Section 232 tariffs on steel and aluminium, though these would take longer to implement. While fewer tariffs would be positive for now, the prolonged uncertainty poses a downside risk.

What happened Friday

In the US, July's PCE figures aligned with expectations, with headline inflation at 2.6% y/y and core inflation rising to 2.9% y/y, marking the third consecutive monthly increase in core inflation and leaving the door open to a potential rate cut in September. Meanwhile, August's revised Michigan Consumer Sentiment index dropped to 58.2, indicating a modest decline in consumer confidence, as both current conditions and future expectations weakened, with a growing number of consumers viewing jobs as 'hard to get'.

In euro area, we received inflation figures for France, Germany and Spain ahead of the euro area inflation release this Tuesday. Both France and Spain reported lower-than-expected inflation. French HICP inflation fell to 0.8% y/y, below the expected 0.9%, driven by muted services inflation, while Spain's headline inflation remained steady at 2.7% y/y, below the anticipated rise to 2.8%, though core inflation edged up to 2.4% y/y. In contrast, German HICP inflation surprised to the upside at 2.1% y/y, driven by base effects in energy and goods as well as strong food prices. Overall, we expect euro area HICP inflation to come in at 2.0% y/y (cons: 2.1%).

In Sweden, GDP figures were revised upward as expected, slightly exceeding consensus at 0.5% q/q and 1.4% y/y. Consumption rose 0.4% y/y in Q2, signalling some recovery for households, while retail sales improved in July but remained below early-year levels. Backward revisions lowered GDP growth for both FY2025 and FY2024, yet Q2 recovery momentum was stronger than anticipated, presenting a mixed outcome for the Riksbank.

In Norway, the NAV unemployment rate remained steady at 2.1% (s.a.), aligning with Norges Bank's June MPR estimate and should in isolation support the case for a September rate cut. Meanwhile, Norwegian retail sales rose by 0.6% m/m in July, slightly below our expectations of a 1% lift signalled by leading indicators, following a largely flat performance in Q2.

Equities: Global risk sentiment deteriorated on Friday amid a sell-off in US yields, led by the long end, with the 30-year US Treasury yield rising by 4bp. The S&P 500 closed -0.6% on Friday, erasing earlier gains from the week and ending broadly unchanged for the week. Unsurprisingly, defensives outperformed cyclicals by 1pp on Friday. The sell-off in cyclicals was led by the tech sector, after a strong run last week, declining 1.6%. In Europe, the CAC 40 continues to underperform amid lingering political turmoil.

FI and FX: On a relatively muted day in the FX market terms of price action, SEK, NZD and AUD gained vis-à-vis GBP and JPY. EUR/USD ended the week close to the 1.17 level, EUR/SEK close to 11.05 and EUR/NOK around 11.75. The 10Y US Treasury yield finished the week at 4.23% - around the lowest in about two weeks. Both the 10Y US and German swap spreads ended the week at a tighter level.