Markets eye labour data after PCE inflation paves way for Fed cut

Markets

Friday’s US July PCE inflation gauges printed bang in line with expectations. Lacking signs of tariff‐related inflationary pressures, they basically vindicated Fed chair Powell paving the way for a first rate cut in a year at this month’s meeting. A softer Chicago PMI and a downward revision in the US Michigan consumer survey’s inflation expectation gauges added to the US yield curve steepening. Net daily changes varied between ‐1.3 bps (2‐yr) to +5.2 bps (30‐yr). European rates followed the same curve movement, adding up to 3.8 bps at the long end. The first national inflation readings (Germany, France, Spain) suggest little to no surprises to tomorrow’s EMU print expected at 2%. That allows the ECB to stick to the sidelines for some time to come with its 2% deposit rate. The euro tried to capitalize on some dollar weakness that prevailed in the early US trading hours with EUR/USD pushing for the 1.17 barrier. The move lacked strength and conviction, perhaps due to the long weekend ahead in the US (markets closed today for Labour Day), but the pair is giving it another shot this morning (1.1714). A federal appeals court late Friday found that US president Trump had gone too far in his use of emergency powers, mostly under the veil of national security, to install his signature import tariffs. It gave the US administration a mid‐October deadline to appeal to the Supreme Court before the ruling takes effect. It’s considered the most consequential ruling so far but comes along with several other judges having concluded that the president is acting without legal support. It’s one of the legal themes to keep an eye at, the other one being Trump vs Cook. Friday’s emergency hearing on the firing of the Fed board governor came with no initial ruling though. Stock markets ended Friday on softer footing. The main European and US indices (especially tech) printed losses up to 1%.

With US investors lacking and an uninspiring economic calendar elsewhere, including the euro area, trading is likely to be technically inspired. That’ll change starting tomorrow though. The US offers an important economic update, kicking off with the manufacturing ISM for August. The JOLTS job report is due Wednesday, the services ISM and ADP job report on Thursday and the official payrolls on Friday. After Powell’s pivot at Jackson Hole, markets are probably especially vulnerable for downside surprises in anything related to the labour market. That would trigger additional dovish repositioning (eg. from two to three rate cuts this year) in US markets, weighing on front‐end yields and the dollar. The European focus is mainly directed towards France, where the vote of no confidence is drawing near (September 8). The OAT/swapspread is on our radar.

News and views

South Korean August trade data showed export growth of 1.3% Y/Y in August, showing no harm so far from the higher reciprocal tariff rate installed by the US in July (15%). Semiconductor exports jumped by 27% with vehicle shipments rising by 9%. It will be interesting to see if export momentum holds going into year‐end. The US Commerce Department complicated things on Friday by saying that it will revoke a waiver (in 120 days) for South Korean companies Samsung and SK Hynix to use US technologies in their Chinese operations. These regulations allowed them to import chipmaking equipment without applying for a new license each time (“validated end user”). South Korean imports fell by 4% Y/Y with the trade surplus slightly narrowing from $6.6bn to $6.5bn.

EC president von der Leyen said that the EU’s $150bn SAFE programme reached full subscription. Under the programme, cash will be borrowed against the EU budget to member states to jointly spend on military purchases. Those are mainly EU manufactured products with the EU imposing clauses that limit the amount of third‐country components. The EC will now review the bids and optimize the distribution of the funds. Initial disbursements could already begin this year.

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