Inflation prints and FOMC Minutes take centre stage

In focus today

In the US, the minutes from the FOMC's July meeting are released this evening. Markets are looking for a more detailed sense of the committee's thinking beyond Kevin Warsh's limited forward guidance. Three participants voted in favour of a hike, and since then, several others have flagged willingness to support a hike if warranted by incoming data.

In the euro area, final July HICP inflation is due and is expected to confirm the flash estimate at 2.9% y/y for headline inflation and 2.5% y/y for core inflation. Wage developments will also be in focus with the release of Eurostat's Q2 Labour Cost Index (LCI), the first read on wage growth for the quarter. While a useful early indicator, the LCI measures labour costs per hour worked, whereas the ECB tends to focus on compensation per employee as its preferred wage-growth gauge.

In the UK, July CPI is released. The UK has been on a disinflationary trend since the fall, although both headline and core inflation remain above target at 2.6%. The PMI survey suggests, price pressures have eased further in July, but new energy price caps are set to pull headline inflation higher to 2.9% y/y.

In China, the 1-year and 5-year Loan Prime Rates (LPRs) are due overnight. We expect both to remain unchanged, as they have been since May last year. While the People's Bank of China has signalled room for easing, it typically lowers the reverse repo rate before adjusting the LPRs, and the reverse repo rate has not changed recently. Still, we expect moderate monetary easing soon after the Politburo signalled more policy support in July.

Economic and market news

What happened overnight

In the US, President Trump announced a three-day pause in planned 50% tariffs on around USD20bn of goods from Canada, which were otherwise set to take effect at midnight. Trump said the two sides had reached a deal, subject to final documentation, and raised the possibility of reviving Keystone XL, a proposed oil project. Canada has not confirmed the full terms, while Prime Minister Mark Carney said important work remains.

In commodities, Brent crude briefly topped USD92/bbl overnight as fresh geopolitical headlines added to uncertainty. UAE missile alerts were followed by Abu Dhabi saying two missiles launched from Iran had targeted maritime traffic, prompting it to suspend trade and financial transactions with Tehran. UK maritime authorities also reported a vessel strike while leaving Hormuz, and a separate cargo ship was hit off Yemen. The incidents point to widening disruption across key shipping routes, with Hormuz traffic still limited despite Trump's claims that the strait is open.

What happened yesterday

In the UK, the July/June labour market report was on the weak side. July payrolls declined by 13K and revisions pointed to heavier job losses in June as well. The unemployment rate was unchanged at 4.9%, slightly above consensus at 4.8%. Wage pressures eased, but somewhat less than expected, with private sector (3M rolling average) wage growth declining to 2.8% in June from 2.9% in May, while average earnings excl. bonuses came in at 3.5%, slightly above consensus. Overall, the report supports our call for the BoE to remain on hold for the foreseeable future.

In Germany, the ZEW economic sentiment surprised to the upside in August, with expectations rising to 34.2 (cons.: 30.0, prior: 26.3), while the assessment of the current situation improved to -61.1 (cons.: -69.3, prior: -77.6). The current situation is now almost back at the levels seen before the war in Iran, although expectations remain somewhat lower. The data follows a string of upside growth surprises in the euro area. Growth is also increasingly supported by fiscal stimulus.

In the US, import prices came in below expectations in July, falling 0.4% m/m (cons.: +0.1%, prior: -0.3%) and marking the largest monthly decline since May 2025. The decline was driven by lower fuel prices, as falling petroleum prices more than offset higher natural gas prices, while nonfuel prices increased.

Also in the US, industrial production and manufacturing output both rose 0.2% m/m in July, only slightly below June's 0.3% increase. Manufacturing excl. motor vehicles and parts rose 0.4%, while mining output increased 0.2% and utilities output rose 0.5%.

Equities: Equities were markedly lower on Tuesday, with the S&P 500 and Stoxx 600 both down 0.7%. Investors have so far digested higher yields largely through a classic value-versus-growth rotation. European banks have outperformed real estate by 7pp since long-end yields began rising meaningfully about a month ago. Yesterday, however, the rotation shifted towards a more traditional defensive preference. Investors bought sectors such as consumer staples and health care, funded by cyclicals, such as tech, industrials and materials, all of which were down 2-3%. Futures are continuing lower this morning. This kind of defensive rotation is what we expect to see more of going forward, as outlined in last week's Equity and Cross-Asset Strategy report. Higher yields revive the risk of a rollover in leading indicators, which are already more prone to a rollovers, simply as they sit on elevated levels. Such a rollover would normally be accompanied with defensive outperformance.

FI and FX: It was an ugly cocktail for European assets yesterday with equities moving lower, European yields rising as the curve bear-flattened and commodities tracking higher. While risk sentiment remains sour in Asia, US yields have steadied in overnight trading and the 10Y UST yield has dropped from an intraday high of 4.75% yesterday to 4.69%. In our Yield Outlook released yesterday, we conclude that markets expect too many ECB hikes and see room for European rates to move lower. EUR/USD is trading sideways around 1.1580. EUR/NOK continues to drift lower, supported by oil prices as Brent crude closes in on USD 92/bbl amid the deadlock in the US-Iran negotiations. Today's focus is on the release of UK inflation data for July, and later this evening we get the Fed minutes from the July meeting. The ECB's Lagarde is also scheduled to speak. In Sweden, focus is on tomorrow's Riksbank decision and the SNDO's 10Y SGB auction, which we see as an attractive buying opportunity in the SGB1067 (Oct-36).