Trump rejects Iranian offer to open the strait of Hormuz

In focus today

• The data calendar for today is empty, so we will focus on the ECB President Lagarde's speech at the European parliament in the afternoon. With the turmoil in the bond markets in recent weeks, markets will be listening to Lagarde's speech for any comments on the euro area bond market or inflation outlook.
• In Australia, we expect the Reserve Bank of Australia (RBA) to hike its cash rate by 25bp to 4.60% early Tuesday morning. The move is almost fully priced in by the markets, which expects a total of 2-3 more hikes over the coming year. With the policy rate already at a relatively high level, we think risks are skewed towards the RBA ultimately delivering less than that, even if tomorrow's hike is a done deal.
• Later in the week we keep an eye on the US September jobs report and the euro area September flash HICP, both due on Friday. We think that the labour market in the US is heating up and thus expect a strong jobs report. The euro area flash HICP is preceded by September flash inflation prints for Germany, France, and Italy on Wednesday and for Spain on Tuesday. These releases will give indication on where the euro area data lands at the end of the week.

Economic and market news

What happened overnight

In commodities, Brent crude is trading slightly bellow USD 99/bbl this morning, up around a percent from the previous close, after President Trump publicly rejected an Iranian ceasefire offer over the weekend. See our full comment on this weekend's geopolitical developments in the section below.

In Japan, minutes from the BOJ July meeting were released. The overall tone of the minutes was hawkish with many BOJ policymakers discussing the need to focus on mounting inflation risks and some calling for faster interest rate increases. The inflation pressures in the Japanese economy were highlighted this morning by the August services PPI reading. The print came in at 3.7% y/y (3.6% in July) which is the fastest pace of corporate services inflation in over two years.

In China, industrial profits for August were released. The print slowed down significantly to 4.2% y/y growth (11.20% in July) as the growth in technology was overshadowed by a persistently weak domestic market. Profits for the computer, communication and electronic equipment manufacturing industry for the January-to-August period rose 110% from a year earlier. By contrast, the domestic market driven by wine, beverages and refined tea manufacturing industry was among the worst performers, with profits falling 34.7% from the year prior.

What happened over the weekend

In geopolitics, the weekend tempered hopes of easing tensions in the Middle East. On Saturday, the US president Donald Trump rejected the Iranian ceasefire offer. The Iranian proposal would have opened the Strait of Hormuz in seven days in return for the US lifting its port blockade and "doing certain things". We think it is possible that a temporary deal to open the strait can be reached ahead of the US mid-terms, but a permanent agreement is another thing. Especially, as the WSJ reported on Friday that Trump has told aides he expects to resume bombing Iran after the November mid-terms. A deadlocked limbo remains our main scenario.

The US-China relations on the other hand show small signs of easing. The results of last week's meeting between presidents Trump and Xi were published on Saturday. The main outcome of the talks was an agreement to ease tariff treatment for USD 30bn of non-sensitive goods in each direction. The two countries also agreed to set up a channel for AI discussions. The next round of AI discussions is set for November. The presidents are set to meet twice more this year; in Shenzhen in November, and at the G20 meeting in Miami in December. The agreements are incremental in nature but nevertheless mark very modest easing in US-China relations.

In the euro area, the rising momentum in credit growth continued in August with our measure of the credit impulse rising to the highest level since 2022. Rather than measuring the yearly change, the credit impulse measures the six-month change which is better correlated with GDP growth. The data suggests that the growth momentum in the euro area is not majorly disturbed by higher interest rates thus far.

Equities: Global risk sentiment had a strong session on Friday ending 0.4% higher, with a clear cyclical outperformance, driven by a late session rally. Both S&P500 and Nasdaq rose 0.5%, while Russell2000 rose 0.1%. Tech, industrials and financials were at the top of the table. Risk sentiment has taken a turn for the worse at the start of the week after President Trump rejected Iran's latest proposal to reopen the Strait of Hormuz over the weekend, reversing much of the diplomatic optimism that supported markets into Friday's close. Asian equities are starting the week on a week footing, as is the US futures being down about 0.3%. European futures are in green catching up to the after-European-hours surge on Friday.

FI and FX: Bond yields remained elevated on both sides of the Atlantic towards the end of last week despite the improvement in broader risk sentiment. Brent oil price rose near USD107/barrel on Monday morning after Trump rejected Iran's latest proposal to reopen the Strait of Hormuz. The USD swap curve steepened with the front end rising about 10bp and the back end climbing about 15bp over last week as a whole. The move spilled over into EUR rates as well, with the 10Y Bund yield and EUR swap rate both rising about 10bp. EUR ZC inflation pricing remained broadly unchanged ahead of the September flash HICP release this Friday, where our forecast (headline 3.6% y/y, core 2.5% y/y) is in line with consensus. In FX markets, broad USD was the strongest performer of last week, and EUR/USD fell below 1.14 driven by a continuing string of stronger-than-expected US macro data. We forecast Friday's US NFP at +100k and unemployment rate declining to 4.0%, which could fuel further USD strength ahead. JPY also recovered ground last Friday following comments from Japan's PM Sanae Takaichi, but USD/JPY has risen modestly again on Monday morning.