Inflation data strengthens case for September ECB hike

In focus today

In the US, ADP private sector employment growth for August is due. Private sector employment moderated during the summer. Weekly ADP estimates have recently pointed to slightly higher job creation, suggesting a modest pick-up in private payroll growth in August.

From Canada, we will receive the Bank of Canada policy rate decision, with the policy rate expected to remain unchanged at 2.25%. Markets are also pricing in no change at tomorrow's meeting.

In the evening we will receive Danish FX reserve data for August. The release is expected to show that the central bank intervened in the FX market in August, as EUR/DKK returned to its June level, when the bank intervened for the first time in more than three years.

Economic and market news

What happened overnight

In commodities, Brent crude climbed above USD 95/bbl., after trading around USD 90/bbl. earlier this week, its highest level in nearly six weeks, as renewed US-Iran hostilities raised concerns over Middle East supply risks. The US launched a second round of strikes in three days against IRGC targets, with Trump warning that if Tehran retaliates, it will be hit "at a much harder and higher level".

In New Zealand, the Reserve Bank of New Zealand (RBNZ) lifted the Official Cash Rate by 25bp to 2.75% as expected, but the New Zealand dollar weakened as the bank signalled a more gradual tightening path than markets had priced in. The RBNZ flagged further hikes, but highlighted downside risks to the economy, with its rate projections remaining well below market pricing.

What happened yesterday

In the Euro area, HICP inflation increased to 3.3% y/y (cons: 3.3%, prior: 2.9%), while core inflation declined to 2.4% (cons: 2.5%, prior: 2.5%). The increase in headline inflation was driven entirely by higher energy prices, as food inflation was unchanged and core inflation declined. The decline in core inflation reflected lower services inflation, while goods inflation increased. Momentum in core inflation remains very low with little signs of energy prices spilling over to underlying inflation, as the 3m/3m SAAR measure edged down to 2.6% from 2.7%. With inflation back above 3%, a September hike looks like a done deal.

Also from the Euro area, final manufacturing PMI came in at 52.7, broadly in line with the flash reading of 52.8. New data for Spain and Italy showed PMIs falling slightly below the 50-mark, while the German PMI was revised up to 54.3 from 54.1. Euro area manufacturing is thus showing a rebound, with Germany in the driver's seat, which is very different from what we have seen over the past couple of years.

Finally in the Euro area, the unemployment rate was unchanged at 6.4% in July (cons: 6.3%, prior: 6.4%), slightly higher than expected. Among the largest economies, unemployment was highest in Spain (10.0%), France (8.3%) and Italy (7.8%), while Germany and the Netherlands recorded the lowest rates at 4.0%. The unemployment rate remains low in a historical perspective.

In the US, JOLTS job openings increased to 7.271m in July (cons: 7.300m, prior: 7.182m), with the June figure revised lower (from 7.359m). Hiring, layoffs and quits all declined, sending mixed signals. The ratio of job openings to unemployed job seekers edged higher, which has historically been a useful indicator of wage growth.

Also in the US, the ISM manufacturing index fell to 54.6 in August (cons: 55.2, prior: 55.6) but remained at a solid level. The production index was broadly unchanged, yet still high, while new orders declined notably. The revised S&P Global manufacturing PMI also pointed to broadly sideways activity at 53.9, up from the flash estimate of 53.2. Overall, the releases suggest somewhat softer manufacturing activity and a weaker labour market than expected, although cyclical data still looks solid.

On the wires, Fed Governor Barr, who is a permanent FOMC voter due to his seat on the Board of Governors, said he would support keeping rates steady if inflation shows signs of moderating towards 2%. However, he added that if inflation does not moderate sufficiently soon, the Fed should act decisively and raise rates. Barr also noted that the labour market remains stable, with low unemployment, while consumer spending has so far been resilient.

In Sweden, the manufacturing PMI increased to 56.1 in August from 55.7 in July, remaining comfortably in expansionary territory. The improvement was supported by production, employment and inventories, confirming that the manufacturing sector continues to hold up well. Overall, the release confirms the strong trend seen so far this year. se mindre

Equities: The market dynamics from Monday extended into yesterday, leading to weak risk appetite with global equities down 0.5%. Yet again, higher oil price, taking yields higher, weighed on equities where S&P500 ended 0.7% lower, with Nasdaq 1% lower and Russell2000 down 1.2%. Unlike Monday, yesterday's equity rotation was clearly a defensive rotation. The four defensive sectors all posted gains with Energy at the top rising 1.8%, with the 7 cyclical sectors all posting declines, with consumer disc at the bottom at -1.6%. Therefore unsurprisingly, defensives outperformed cyclicals by more than 1.5pp. Vix rose 1.5 to the still low 16.4. The negative performance has carried over into the Asian session where are all in red. US equity futures are marginally weaker this morning.

FI and FX: Global government bond yields continue given the rise in energy prices, where gas prices are rising significantly and thus adding to expectations for tighter global monetary policy. On top of this there is still the solid supply of government bonds, which are adding pressure on government bond yields. However, there is not much risk-off sentiment in the market as credit spreads are still well-behaved and there is plenty of supply in the primary market.

In the currency markets, the EURUSD moved below 1.16, while yen moved above the 160-level versus the dollar. However, the movements are small.