Focus on US CPI and ECB meeting

This week, we published our updated macroeconomic projections for the main economies and the Nordics. We expect euro area and US growth rates to converge as the US economy is now losing steam, and the euro area economy is gradually picking up speed. We expect inflation to stabilise close to central bank targets by next year and interest rates to decline significantly, albeit not back to zero. The risk picture has changed, as upside inflation risks are less pronounced while downside growth risks have risen. That said, soft landing remains our base case. Nordic economies are expected to follow the trend and witness accelerating growth towards 2025. Read more on Nordic Outlook – Normalising economies, with risks, 3 September.

As the risk of inflation remaining too high for too long has abated, central banks can afford to front-load rate cuts compared to what we expected before. We have revised our calls both for the Fed and the ECB. We now expect the Fed to conduct 25bp rate cuts at each meeting until summer next year, starting this month. We expect the ECB to cut rates by 25bp both in next week’s meeting, and again in December, and follow with three more cuts in 2025. If we are right, policy rate would land at 3.00-3.25% in the US and at 2.50% in the euro area by year-end 2025. Our forecast remains hawkish relative to market pricing, and the risks are tilted towards even lower rates.

The week in financial markets played an already familiar tune as risk appetite was poor on most days and volatility increased, while USD and short-term interest rates declined. Underperformance in the tech sector has been linked to sector rotation and earnings disappointments, but rising stock market volatility is also in line with weaker macro momentum and tighter liquidity in the global financial system, as central banks continue to taper their balance sheets.

Next week’s main event will be the ECB meeting on Thursday where a 25bp cut now seems like a done deal. Wage growth in euro area declined significantly in the second quarter to 4.3% y/y from 4.8% y/y in Q1, measured by the ECB’s closely watched compensation per employee measure. Hence, despite service inflation remaining high for now, ECB can be more confident that underlying price pressures are abating, and inflation will return to target. But even so, weak productivity and labour force growth suggest that euro area’s potential growth remains weak. At roughly similar growth rates, the euro area is more prone to overheating and re-emerging inflationary pressures compared to the US.

Next week’s key data point will be the US August CPI due on Wednesday. We forecast headline inflation easing to +0.1% m/m SA (2.5% y/y) but core inflation remaining steady at +0.2% m/m SA (3.2% y/y). On the political front, Kamala Harris and Donald Trump will have their first face-off in a live debate on Tuesday evening US time. Read more about the current outlook from our first US Election Monitor - Latest data shows Harris in a narrow lead, 6 September. Also, in China focus will be on Monday’s CPI data. We expect rising headline inflation to 0.7% y/y from 0.5% in July, but core inflation will likely stay lower. China August trade data is released on Tuesday, and it will be interesting to see whether China’s exports continue to reflect the persistent weakness in global manufacturing.

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