German ZEW and UK labour in focus

In focus today

• In the euro area, the German ZEW index for September will be released today and is expected to show further improvements in both the assessment of the current situation and expectations. The consensus forecast points to the current situation reaching its highest level in more than three years.
• In the UK, labour market data for July and payroll data for August will be released today. Average weekly earnings were 4.1% in June, still elevated and well above the BoE's 2% inflation comfort zone, though trending lower. The higher level is mainly driven by the public sector, which largely reflects lagged effects, while private sector wage growth is lower, standing at 2.8% in June. Unemployment is stable at under 5%, with the June print coming in at 4.9%. The BoE expects unemployment to peak at 5.3% by 2027. Job growth turned negative in July at -12,85, signalling ongoing labour market cooling, though not yet at an alarming pace. Meanwhile, employment in the PMI indicated a slower pace of job losses in August. See our: Bank of England Preview - On hold amid aggressive market pricing, 11 September.
• In the US, we revised our Fed call such that we now expect a hike of 25bp on Wednesday meeting. We maintain our forecast for 25bp increases at both the December and March meetings, taking the Fed Funds rate to 4.25-4.50% towards the end of 2027 (prior: 4.00-4.25%). The combination of slightly higher-than-expected inflation prints last week, strong labour market signals and increased uncertainty around energy prices means we now see a hike as the most likely outcome. Our view that nominal growth would eventually push the Fed towards a tightening bias is unfolding more clearly than we initially expected, which is why we have added an extra hike to our forecast profile.

Economic and market news

What happened overnight

In China, the monthly batch of data for August was released overnight showing a continued picture of weak domestic demand. Retal sales growth declined from 0.6% y/y to 0.4% y/y (consensus 0.8% y/y) while new home prices dropped -0.17% m/m after -0.18% m/m in July. Home sales showed further signs of stabilisation, though, leaving a glimmer of hope that the housing crisis is nearing a bottom. We expect sales to stabilise this year and home prices to stabilise in 2027. Industrial production continues to grow at a robust pace rising from 4.5% y/y to 5.2% y/y (consensus 4.8% y/y) lifted by high-tech production such as chips and robots and supported by strong export growth. The government has signalled more investment projects for the rest of the year to lift domestic demand and job creation.

What happened yesterday

In Sweden, final inflation was slightly higher than the flash estimates. CPI came in at 0.31% y/y (flash: 0.28%), CPIF at 0.74% y/y (flash: 0.72%) and CPIF-XE at 0.53% y/y (flash: 0.52%). The revisions are modest and do not materially change the picture of subdued inflation pressure, but they add a small note of caution for the Riksbank.

Equities: Rotation rather than capitulation. Equities closed lower yesterday after a pronounced roller coaster session, with several major indices recording intraday moves of around 1.5%. Crucially, macro was not the catalyst. Instead, price action reflected the impact of rising oil prices and renewed concerns around AI, precisely the two tail risks that have dominated investor anxiety this year.

The nexus between higher energy prices, inflation risk and bond yields goes directly to the questions we receive most frequently from investors, as discussed in this weekend's The Editorial - Top five questions you ask us, 14 September. The rotation beneath the surface was distinctly defensive, but this was not an indiscriminate selloff. Consumer Staples, Health Care and Telecom all gained more than 1%. Recession is not currently at the centre of investor conversations, and the present challenges facing financial markets have not translated into fears of a deeper macro downturn. Consequently, investors are rotating between cyclicals and defensives rather than engaging in a classic risk-off retreat. Asian equities are extending the decline this morning, while US and European equity futures are marginally lower.

FI and FX: US yields have continued to push higher, with the 10Y trading above the 5% threshold. European rates also increased on Monday, driven by a fresh surge in energy prices and a hawkish ECB. The Bund 2Y rose 7bp. Energy was the dominant driver, with Brent rising intraday before settling around USD107/bbl, while TTF rose above EUR80/MWh. Continuing rise in energy prices and weakness in tech stocks drove broad risk-off sentiment on Monday, which pushed EUR/USD down to 1.1550 level. USD and CAD were the strongest performers in the G10 space, while NZD and SEK continued their recent underperformance. Neither Swedish inflation details nor the preliminary election outcome was enough to rattle the SEK yesterday. EUR/NOK has traded broadly sideways with a slight upward bias over the past few trading days, largely within the 10.70-10.80 range. EUR/DKK started to rise again yesterday and climbed to 7.4755.