Risk sentiment falters ahead of central bank flurry

Market movers today

Today we receive the final August inflation figures for the euro area where we do not expect any revisions compared to the flash estimate. The flash estimate showed that inflation in August was slightly higher than expected. Headline inflation remained at 5.3% and core inflation ticked down from 5.5% to 5.3% y/y. In today's release, it will be interesting to see the underlying dynamics of the aggregate prints especially the details on the decline in core inflation. For more details on inflation, see Global Inflation Watch: Underlying price pressures remain sticky,13 September

The OECD will publish its updated projections for the global economy.

In the US, data for housing starts and building permits in August will be released.

Overnight, we get 1-year and 5-year loan prime rates from China but since the rates were just cut last month and no changes were made last week in the medium-term lending rate, we expect unchanged loan prime rates this time.

The 60 second overview

Sentiment: With ECB governors on the wires warning that rates will remain high for some time, and ahead of a flurry of central bank meetings, market sentiment is faltering. Oil price has climbed above USD 95 level, and with the barrel price more than 20 dollars higher than in June, stagflationary fears are again raising their head. In an FT-Booth survey over the weekend, majority of the respondents cited oil supply restrictions as their biggest concern regarding inflation outlook. Weak risk sentiment weighed heavily on Scandi currencies yesterday with EUR/SEK reaching a new all-time-high level.

Geopolitics: EU-China trade tensions are brewing with an EU probe into Chinese EV subsidies. We think these increasing tensions are worth monitoring as EU trade deficit with China has grown sharply in recent years. Imports of EVs to Europe was bound to become a flash point of tensions sooner or later, not least considering the ongoing challenges in the German auto sector. While tensions are growing between Europe and China, US weapons sale to Taiwan under sovereign-nation program has fed new tensions between the two, and China has increased the intensity of military exercises around Taiwan lately. Meanwhile, if we zoom in on Europe, Ukraine has made significant advance in the battlefield, successfully breaking through the first Russian line of defence in the south. If they are able to push further, they could eventually be able to attack key Russian logistics routes. Read more in our monthly Geopolitical radar - EU-China trade tensions brewing, Ukraine makes advance, 19 September.

US: The US Congress continues to struggle to pass a funding bill to avert a looming government shutdown on 30 September. On Sunday, the leaders of the hardline republican House Freedom Caucus struck a deal with representatives from the more moderate Main Street Caucus on a short-term 'continuing resolution' funding bill until 30 October, which House speaker McCarthy will bring to the House floor on Thursday. But as the bill contains immediate 8% spending cuts to several federal agencies, and excludes further aid to Ukraine as well as disaster relief, it will not gain support from the Democratic-controlled Senate, even if it passes the House vote. Unless the hardliners eventually agree on a passable deal, McCarthy can either move towards passing a bipartisan deal negotiated in the Senate with support from House democrats, or lead the government towards a shutdown. The former could risk McCarthy's position as House speaker, as some Republicans including Florida representative Matt Gaetz, have already threatened to bring up a motion-to-vacate, while the latter would disrupt public services and salary payments, potentially adding to the current downside risks to the economy.

Equities: It was a dull session on Monday, with little news and thereby little equity moves. US closed unchanged while Europe sold off about -1% in catch-up with the weak US Friday session. Last week's losers rebounded, including big tech, semis and homebuilders. Industrials performed well in the European and Nordic sessions and banks underperformed. The wait-and-see mode for Fed lingers today, with US futures unchanged this morning and Asian markets mostly lower too.

FI: Rates rose across the board driven by the front end, with 2y around 4bp higher to 3.26%. ECB governors were on the wires saying it is premature to discuss rate cuts, and rates may peak for the winter, spring and summer. Today, focus turns to the euro area final inflation print.

FX: NOK and SEK were under pressure on Monday amid poor risk sentiment and negative equities. EUR/SEK printed a new all-time-high at 11.995 and EUR/NOK tested 11.60. Both Scandies regained most or some of the losses in the evening session, though. Meanwhile, EUR/USD was relatively stable, yet a little bit higher toward 1.0680. USD/JPY moved sideways around 147.60 and GBP/USD oscillated just below 1.24.

Credit: The slightly sour sentiment in the equities markets rubbed off on the credit markets yesterday, where iTraxx main widened 0.2bp to 69.3bp and Xover widened 0.9bp to 389bp. That said, liquidity improved in the cash bond market where the spread performance was also better. Also the primary markets continue to work, exemplified by EUR deals announced from the local issuers Elisa and Spar Nord and the closure of a EUR600m NPS Commerzbank issue.