Markets eye Powell's speech in the afternoon

In focus today

The Fed's Jackson Hole Symposium continues today and tomorrow. Today's highlight will be Fed Chair Powell's speech. Last year, Powell provided strong guidance that rate cuts were set to begin soon. This time, markets are again expecting the Fed to cut rates in September, but the direction of travel is arguably less clear, not least given the two-sided tariff risks and Trump's attempts to influence the decision-making.

In the euro area, focus turns to the negotiated wage growth indicator released by the ECB. Declining wage growth is the biggest downside risk to our call for the ECB holding rates steady for the rest of the year. The negotiated wages indicator will show how the collective bargaining part of wages fared in Q2.

The Swedish labour market statistics for July, including Statistics Sweden's official estimate of the unemployment rate, will be released today. We expect the unemployment rate to print at 8.6%, up from 8.3% in June. The weekly labour market statistics have been weak for a while and especially so in July. The stubbornly weak Swedish labour market remains one of the Riksbank's cyclical concerns and today's figure is at least of some importance for the Board.

Economic and market news

What happened overnight

In Japan, core inflation slowed modestly in July to 3.1% y/y (cons: 3.0%) from 3.3% in June. Inflation continues to be above the Bank of Japan's 2% target, although primarily driven by rising food prices and new energy subsidies. Excluding food, alcoholic beverages and energy, inflation remained steady at 1.6% y/y.

What happened yesterday

In the trade war, the EU and US have now formally made a trade deal. The deal is very similar to what has been communicated previously, with a 15% tariff rate for the vast majority of EU exports, applying across most sectors, including cars, semiconductors and pharmaceuticals. Zero-for-zero tariffs on a number of strategic products, including all aircraft and component parts, certain chemicals, certain generics, semiconductor equipment, certain agricultural products, natural resources and critical raw materials. Additionally, EU companies are to invest USD 600bn in strategic sectors in the US through 2028 and to buy USD 750bn in energy products.

In the US, flash PMIs for August came in stronger than expected. Manufacturing rose to 53.3 (cons: 49.7) from 49.8 and services fell to 55.4 (cons: 54.2) from 55.7. The increase in manufacturing was due to higher new orders, employment, and output index. The output index is at the highest level in more than three years. Hence, the details are very strong.

In the euro area, August PMIs were also a positive surprise with the composite measure rising to 51.1. (cons: 50.6) from 50.9 due to a rise in manufacturing while services declined. This is a milestone for the euro area manufacturing sector as it recorded growth for the first time in more than three years with the PMI rising above the 50-mark to 50.5 (cons: 49.5) from 49.8. The rise was due to a rise in new orders and output. While services PMI declined to 50.7 (cons: 50.8) from 51.0, it is still a strong report overall.

We expect the ECB to have concluded its cutting cycle and leave the deposit rate unchanged at 2% while markets are still pricing a risk of a final cut from the ECB in the coming six months. With today's stronger data, the risk of a final "insurance cut" has declined. A continued weakening of the services sector in the coming months is the main risk factor for a final ECB rate cut in our view.

Consumer sentiment declined unexpectedly in August to -15.5 from -14.7 (cons: -14.7). Consumers are likely reacting negatively to higher food prices as food inflation has increased by one percentage point since January, even though food is only a minor part of private consumption. The weak confidence should dampen growth in private consumption despite a strong labour market and rising real incomes. 

In Denmark, consumer sentiment continued to decline to -17.2 from -15.7. This development is driven by a worsening view of both the private and nationwide economies. Inflationary fears continue to plague consumers as food prices, in particular, have continued to increase over the summer. At the same time the Danish stock market has experienced multiple large downturns, which are not improving sentiment either.

In Norway, Q2 mainland GDP growth came in significantly stronger than expected at +0.6% q/q (cons: 0.3%). Looking at the details, the surprise was mostly driven by mainland exports at +4.2% q/q which is probably a one-off. Private consumption grew 0.2%, residential investments were the biggest domestic surprise climbing 4.0% and private investments up 2.2% after a drop in Q1. All in all, a stronger report than we had expected, but weaker than headlines suggest. 

Norges Bank published the Expectations Survey for Q3. Both inflation expectations and wage expectations were slightly below the Expectations Survey for Q2 and below Norges Bank's projections in its June Monetary Policy Report. Overall, a report clearly to the soft side - especially given the GDP surprise in the morning.

In the UK, stronger than expected PMIs added to a hawkish data streak. Composite increased to 53.0 (cons: 51.6), based on much stronger-than-expected services PMI of 53.6 (cons: 51.8), while manufacturing PMI went lower to 47.3 (cons: 48.3). The case for an unchanged Bank of England rate decision in November has strengthened, although we have a lot of incoming data before then.

Equities: Equities took another small step lower yesterday, with Europe outperforming the US, volatility ticking up (VIX higher), and Tech lagging. At first glance, the picture resembled yet another day of rotation into defensives, but that would be an over-simplification. Yesterday's session was not just a sector rotation story. Macro data were abundant, and on balance they surprised to the stronger side. Hence, this should all else equal have led to cyclical outperformance. but energy and commodities led the outperformance. Across assets, yields moved higher, the dollar gained, gold eased, and oil rose - altogether resembling elements of a stagflationary rotation.  Some growth indicators were soft, while price components came in firm. Hence, the inflationary/stagflationary trend somewhat justifiable but then again US small caps outperformed, with the Russell 2000 closing higher, underlining the unusual aggregation of market moves.

In the US yesterday, Dow -0.3%, S&P 500 -0.4%, Nasdaq -0.3% and Russell 2000 +0.2%.

This morning paints a similar picture: Asia trading is mixed, and both European and US futures are essentially flat - markets sitting in wait-and-see mode ahead of Jackson Hole and Chair Powell's speech later today.

FI and FX: Rates moved higher across regions as PMI data for US, UK and the euro area came in stronger than expected. EUR/USD slipped to the 1.16 mark, while EUR/GBP continued trading within a narrow range near 0.865. Yesterday's upside surprise in Norwegian GDP figures for Q2 added significant upward pressure on NOK swap rates, while EUR/NOK dropped 1% to 11.8. The PMI data added upward pressure on oil prices with Brent trading 1.75% higher at USD67.7/bbl. this morning.