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NFP in focus after reports point to cooling US labour market

In focus today

Today's main data focus will be on the US August Jobs Report. We forecast Nonfarm Payrolls (NFP) growth at +80k (cons: +75k, prior: +73k), average hourly earnings growth at +0.3% m/m SA (prior: +0.3%) and unemployment rate at 4.2% (prior: 4.2%).

In the euro area, we get the third estimate of the national accounts data, which includes many details compared to the previous data. Attention will turn to how domestic demand fared in the second quarter and the labour market. We receive both employment data and wage growth in form of compensation per employee which is the ECB's preferred wage data. 

On Sunday, China releases the August PMI's from NBS. Manufacturing PMI disappointed in July with a decline from 49.7 to 49.3 and we look for the index to show a small rise to 49.5 in line with consensus. On Monday, the private PMI is due, with expectations of a slight increase from 49.5 to 49.7. It would confirm a softening of Chinese growth over the summer months, driven by weak domestic demand, which is adding pressure for a step-up in stimulus measures. 

Economic and market news

What happened overnight

In Japan, annual real wage growth is back in positive territory, for the first time this year. Real cash earnings increased 0.5% in July compared to -0.8% in June, supported by solid bonuses. This is a good sign for the BoJ in its push for more demand driven inflation, but it is also likely to decline again unless particularly food inflation declines again. Currently about 7 bps worth of hikes is priced for the October meeting, where we expect the next hike.

The US-Japan tariff deal, Trump signed an executive order reducing US tariffs on automobiles and parts from 27.5% to 15%, easing trade tensions. The higher tariffs had dragged down Japan's export, with Toyota alone expecting nearly $10bn in losses. This reduction provides relief to Japan's export heavy economy and lowers trade uncertainty.

What happened yesterday

In Sweden, flash CPI for August came in slightly lower than we expected at 1.1% y/y, while headline CPIF rose to 3.3% from 3.0% y/y, widening the gap to the Riksbank's forecast. The inflation data was mixed, offering no clear conclusions for September. However, the narrowing core inflation gap provides the Riksbank with some confidence that inflation will trend lower. With CPIF still above 3%, we see it as unlikely that the Riksbank will cut rates in September.

The Swedish government confirmed plans to temporarily cut VAT on food in half from 12% to 6%, between 1 April 2026 to 31 December 2027. Assuming full passthrough, this would lower CPI by 0.8p.p. from April 2026.

In the US, the ADP employment report showed an increase of +54k private sector jobs in August, slightly below expectations of +65k. Manufacturing continued to see minor job losses, while the service sector held up better. Leisure & hospitality remained the strongest sector, as has often been the case in recent years. Meanwhile, the Challenger report revealed a modest rise in layoff announcements in August, though still low by historical standards. These figures align with yesterday's JOLTs report, reinforcing the view that the labour market is cooling, but not collapsing.  

Also in the US, the ISM services PMI rose to 52.0 in August (cons: 51.0) from 50.1 in July, signalling stronger activity in the non-manufacturing sector. Business activity and new orders both saw significant gains, firmly in expansion territory (above 50). While prices remained steady, the employment index stayed in contraction. Overall, the report highlights resilient growth in the services sector.

In China, onshore stocks declined last night following reports that financial regulators were looking at measures to cool the market. This follows a strong rally, which has raised concerns about the potential formation of a new bubble. Onshore stocks have surged 17% from mid-June to late August, driven by private investors shifting rising deposits into equities.

In Switzerland, August inflation data came in largely as expected, with headline sticking at 0.2% y/y. Core inflation was slightly below expectations at 0.7% y/y (cons: 0.8%), leading the slight jump higher in EUR/CHF. Overall, inflation remains on track with the SNBs forecast, supporting our call that the SNB has concluded its cutting cycle, maintain the policy rate at 0%.

Equities: Equity performance was solid, with the S&P500 hitting new all-time highs. Up 0.8% on the day, the S&P500 ended just above 6500 yesterday. The Nasdaq rose by 1.0%, with cyclical stocks clearly outperforming defensive stocks by 0.6%. Yesterday's price action suggests a goldilocks narrative for risk.

The common catalyst yesterday was not found in the ISM report, which was strong, but rather in what seemingly reflects anticipation of today's labour market report. Markets seems to expect a report that justifies the first of many rate cuts (since last year) from the Fed in two weeks' time. This flow rotation into equities from bonds, particularly into duration-sensitive small caps and tech stocks, which tend to benefit most from potential monetary easing, performed well. This also drove the VIX lower, back down close to 15, with the USD gaining.

FI&FX: The USD rebounded yesterday against the rest of G10 currencies following a strong ISM non-manufacturing release. Ahead of the jobs report today, the market is fully priced for a cut from the Fed in two weeks. The UK market recovered further yesterday, where GBP gained against all G10 currencies except for the USD and UK yields inched lower. SEK reversed cause on the recent strengthening trend with EUR/SEK rising towards 11.05.

Author

Danske Research Team

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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