Oil tops USD 100/bbl as ECB prepares to hike, not guide

In focus today

In the euro area, the ECB will announce its deposit rate. We expect the ECB to raise policy rates by 25bp, bringing the deposit rate to 2.50%, in line with consensus and market pricing. We expect Lagarde to retain full optionality over the future rate path and provide no firm guidance, which should limit the market reaction. Read more in ECB Preview - Hiking, not guiding, 4 September.

In the US, August PPI is due for release. In recent months, y/y growth in both headline and core PPI has trended down. Headline PPI inflation is likely to have increased, as oil prices rose again. Unusually, PPI is released before CPI, which is due tomorrow. As a result, PPI could carry more weight than usual for markets.

In Norway, we expect core inflation (CPI-ATE) to rise from 2.7% y/y to 3.1% y/y in August (cons: 3.0% y/y). The main driver is that kindergarten prices were cut sharply in August last year, and this base effect will lift annual growth by about 0.3 pp. Apart from this, we expect only minor changes, although somewhat higher price growth for food and imported goods than last year should add about 0.1 pp to annual growth. As usual, the biggest risk is prices for airline tickets and ICT equipment. If we are correct, core inflation will still be well below Norges Bank's estimate of 3.3% y/y in the June Monetary Policy Report.

In Sweden, July GDP figures will be released, alongside production data (PVI). Consensus points to a modest m/m decline of 0.1% in July, following a 0.2% drop in June and a strong second quarter overall, when GDP rose 1.6% q/q. The monthly indicator is volatile, so a small decline would not be surprising. A strong print, however, would reinforce the view that the domestic economy is gaining momentum and add pressure on the Riksbank to raise rates in the near term.

In Denmark, August CPI data is due for release. We expect CPI inflation to increase to 2.2% y/y from 1.7% y/y in July on the back of significantly higher electricity prices. The inflation level remains elevated from a much higher weight on holiday centres and camping sites, which adds significantly to inflation during the summer months. This is counterweighed by the large cut in the electricity fee in January. Underlying price pressures remain muted in Denmark.

Economic and market news

What happened overnight

In commodities, Brent rose above USD 100/bbl yesterday and held above that level overnight, as the largest wave of US-Iran attacks on shipping since the war began intensified supply concerns. Oil flows through the Strait of Hormuz remain far below pre-war levels and pressure on Red Sea routes is rising. President Trump said the conflict may not end until after the midterms, while the WSJ reported that top White House advisers see a risk it could last through the end of his term, pointing to limited prospects for near-term de-escalation.

In Japan, expectations for another BoJ rate hike next week were reinforced after board member Masu warned that still-loose financial conditions could require rapid rate hikes if inflation accelerates. He said real rates should be moved out of negative territory as soon as possible, citing higher producer, fuel, chemical and food prices, a weaker yen and greater corporate cost pass-through as price risks. Markets have now almost fully priced in a 25bp hike for the September meeting, and a total of 3-4 hikes by next summer.

In the US, at the opening night of the Republican Party's first-ever midterm convention in Dallas, President Trump promised a USD 5,000 payout to adult citizens if Republicans retain control of Congress. The proposal is a direct financial appeal to voters but would risk adding to inflation pressure and fiscal concerns. The proposal could cost up to USD1.3 trillion in total, and increase the budget deficit by some 4%, making it nearly impossible to get through even a republican-controlled congress.

What happened yesterday

In the US, the Treasury announced that today's first expanded long-end bond buyback operation will be up to USD 6bn. This is probably close to the bare minimum needed after the August guidance pointed to more than a doubling of the previous USD 2bn amount, and some investors had seemingly hoped for a larger first step. The announcement applies to today's operation only and does not set the size for later ones. Long-end US Treasury yields rose following the announcement, although the move was contained.

In Poland, the National Bank of Poland kept its key rate unchanged at 3.75%. The decision came despite CPI inflation being just below the upper end of the central bank's target band, mainly due to higher fuel price inflation, while softer wage growth and falling enterprise-sector employment supported a wait-and-see approach.

Equities: Equities were markedly lower on Wednesday as higher energy prices, rising bond yields and a disappointing Treasury buyback announcement weighed on sentiment. The S&P 500 fell 0.5%, while the Stoxx 600 dropped a notable 1.4%. Tech continued to outperform, explaining why US held up better than most regions. Semis finished modestly higher and Meta surged 7% following the release of its Muse consumer AI agent, providing another example of the industry's shift towards increasingly autonomous AI applications. More complex models require greater computing power, which helps explain why semiconductor stocks have remained resilient despite rising yields.

Market breadth was nevertheless weak, with 405 of the 500 S&P constituents closing lower. Cyclical sectors such as industrials and consumer discretionary led the declines, falling roughly ~1.5%. However, this was not a classic risk-off session. Defensive sectors like utilities, consumer staples and real estate also underperformed heavily, explained by the yield sensitivity. As a result, yesterday's sector performance was more consistent with a stagflationary shift than outright growth concerns.

FI and FX: Yields rose yesterday as energy prices pushed higher, with EUR swaps rising around 8bp higher in the 2Y to 10Y segments of the curve. The US announcement of the size of the buyback announcement was slightly less than market anticipated, and we saw the EUR/USD edge slightly higher in tandem with longer Treasury yields. Today, focus turns to the ECB meeting, where a hike is widely expected. We do not expect Lagarde to rock the boat materially, but keeping all options open, which should limit the market reaction in our view. We expect Danmarks Nationalbank to follow the ECB with a 25bp hike. In Norway, this morning's inflation print will be hugely important for Norges Bank's decision later this month. While EUR/NOK made new YTD lows yesterday, the SEK has been a relative underperformer this week.