Inflation surprises from Europe and the US

In focus today

In the US, the manufacturing ISM is released. Early indicators have sent mixed signals on manufacturing activity. Flash manufacturing PMIs came in strong last week, while regional Fed PMIs showed some moderation.

Central bankers will be active today with the ECB's Lagarde and Schnabel and the Fed's Barkin and Williams giving speeches. Inflation seems to be picking up momentum in the euro area as HICP inflation prints from France, Italy and Germany on Wednesday were well above expectations. On the contrary, US PCE release came in well below expectations. See the detailed comments on the releases below.

In Japan, the September Tokyo CPI will be released overnight. We have started to see some small signs that core inflation pressures are moving higher in Japan. The CPI data will show if that is still the case. PMIs suggest businesses continue to raise prices although at a slightly slower pace.

Economic and market news

What happened overnight

In Japan, the quarterly Tankan business survey showed Japanese big manufacturers' confidence hit an ​eight-year high over Q3 with confidence rising to 24 (cons: 25, prior: 22). By contrast, big non-manufacturers' sentiment slid to 35 (cons: 36, prior: 37), the first decline in ​five quarters. Corporate inflation expectations remained elevated at 2.6% within three years but did not accelerate from three months earlier.

In commodities, US President Donald Trump said on Wednesday that he is having conversations about banning diesel exports "every day". The White House is racing to curb soaring energy prices before the midterm election. Should the ban take place, the disruption to the global diesel market already suffering from multiple simultaneous supply bottle necks would be significant.

What happened yesterday

In Sweden, the Riksbank minutes from the September meeting provided more support for rate hikes. All governors moved in a more hawkish direction and the question has shifted from whether to when rate hikes should come. The most hawkish members (Seim and Thedéen) explicitly favour a hike in November while the rest supported the policy path with one hike this year (note that the policy path includes a high probability for a hike in November). The Board is also becoming more concerned about continued SEK weakness. Four of the five members explicitly discussed the krona, indicating that SEK developments are now playing a larger role in the inflation discussion.

In the euro area, inflation exceeded expectations in France, Italy and Germany. French HICP inflation rose to 3.4% y/y (cons: 3.2%, prior: 2.6%), Italian HICP inflation rose to 4.1% y/y (cons: 3.7%, prior: 3.2%), and German HICP inflation rose to 3.3% y/y (cons: 3.2%, prior: 2.9%). The increases in all three were broad-based across the inflation basket, with energy as the biggest driver. The hotter-than-expected inflation prints indicate that euro area inflation on Friday should be elevated as well. The sharp uptick in headline inflation points to further rate increases by the ECB. However, spillovers to core inflation were still only minor. This in turn argues for less tightening than priced by markets, in our view.

In the US, inflation surprised in the opposite direction. August headline PCE decreased to 3.4% y/y (cons: 3.7%) and core PCE decreased to 3.0% y/y (cons: 3.3%). The core PCE release is a clearly dovish signal for the Fed. Expectations for an October hike declined from 50% to 35% after the release. At the same time, Q2 GDP growth was revised up significantly to 2.2% y/y (prior: 1.5%). Both private consumption and non-residential investment contributed more to GDP than initial releases showed. The markets gave more weight to the dovish inflation print and after the releases 2Y treasury yields ticked down, and EUR/USD moved higher.

Equities: Global risk sentiment was solid through most of the day, however a late staged sell-off left global equities down 0.1% and thus ending the month of September in negative territory. S&P500 was down 0.2%, while Nasdaq rose 0.2%. Russell2000 was down -0.4%. Like September as a whole, the top performers yesterday were the tech sector rising 0.5%, and despite much media and commentary headwind the sector has still returned 5.1% through the month. Consumer disc. was also up on the day, with defensives markedly underperforming yesterday. Overnight, equities are higher, particularly the AI/tech-exposed areas following the upbeat earnings report from Micron last night. US futures are in green, while European futures are in red on "catch-down" from late US trading.

FI and FX: European yields declined in a broad fashion yesterday despite the hawkish surprises in country-level flash inflation data from Germany, Italy and France. Even so, long-end OATs continued to increase, pulling the OAT-Bund spread wider yet to 126bp. USD swap rates and Treasury yields twist steepened, declining about 2bp in the front end and rising 5bp in the back end of the curves. US headline and core PCE inflation for August released below expectations, even if part of the surprise was explained by technical revisions to past data. Broad USD remained on a strong footing yesterday with EUR/USD trading lower especially towards the European evening, which was somewhat unusual considering the US curve steepening and the inflation data releases. Cyclical currencies, and not least NOK weakened further.