US to launch Economic "D-Day"

In focus today

• Today is quiet in terms of data releases. Focus remains on the fixed income market after a very volatile week. Potentially another round of trade war between the US and Canada will also receive attention after negotiations collapsed last Friday. Furthermore, the US is set to announce new economic sanctions on Iran and their trading partners today. Both events could result in fresh economic blows.
• For the rest of the week, the main data releases include Germany's Ifo Business Climate Index on Tuesday, followed by US core PCE, personal spending and durable goods orders on Wednesday. The latter is a key indicator of investment activity and offers insight into the AI investment boom. In addition, the Fed's annual Jackson Hole conference takes place on Thursday and Friday, with the Fed Chair's speech scheduled for Friday. Markets will be watching closely for any signals on monetary policy ahead of September.

Economic and market news

What happened overnight

In geopolitics, tensions between the US and Iran remain a key focus as Washington prepares to announce new sanctions targeting Iran's trade partners, with US Treasury Secretary Scott Bessent set to hold a press conference today. The measures have been described by the US Treasury Secretary Scott Bessent as an "Economic D-Day", while Iran has warned that no oil will flow from the Gulf if the "economic war" continues. Although direct military strikes have eased in recent weeks, the lack of meaningful negotiations means the prospects for any deal are slim in the short term.

In commodities, Brent crude oil dropped to around USD93/bbl following a sharp weekly rally, as investors took profits ahead of an expected US announcement on tougher sanctions against Iran. Bessent said Washington would impose the "toughest" sanctions in history, describing the measures as an unprecedented campaign of economic isolation designed to pressure Iran and its trading partners into compliance.

What happened over the weekend

In Canada, Prime Minister Mark Carney announced dollar-for-dollar retaliatory tariffs on selected US imports on Saturday after trade talks with the US collapsed Friday, raising uncertainty around the US-Mexico-Canada trade pact. The measures are set to take effect on 8 September and respond to new 50% US duties on selected exports from Canada worth around USD20bn.

In the US, PMIs were mixed but generally strong, with the composite index indicating the fastest pace of growth since March 2022. Manufacturing weakened to 53.2 (prior: 53.9), while the order-inventory balance declined from July, potentially signalling that growth momentum is levelling off, though the data is volatile month to month and regional Fed surveys have been more positive. Services business activity picked up sharply to 56.8 (prior: 54.6), but both input and output price indices declined. Overall, the release does not provide a clear directional signal.

In the euro area, PMIs surprised positively in August with manufacturing rising to 52.8 (cons: 51.8, prior: 51.9) and services rising to 51.7 (cons: 51.5, prior: 51.7), leaving the composite index at 52.1 (cons: 51.7, prior: 52.0). The weakness in German and French services was thus countered by strength in Southern Europe, and growth in the third quarter is thereby looking rather solid amid the negative supply shocks from the war in Iran and warm weather. Euro area negotiated wages rose 2.44% y/y in Q2 (cons: 2.4%), down from 2.56% y/y in Q1. This was as expected and as hinted by the ECB's wage tracker.

In the UK, PMIs were stronger than expected, with the composite index rising to 52.5 (cons: 51.6, prior: 52.2), driven by a solid services reading at 52.8 (cons: 51.8, prior: 52.1), while manufacturing was in line with expectations at 51.5 (cons: 51.5, prior: 51.9). Price pressures also picked up, with the composite output price index rising to 57.1 from 56.1 and input prices also higher, making the release somewhat hawkish for the Bank of England. However, this follows softer labour market data and inflation figures that were not especially concerning. Markets continue to price one further BoE hike by year-end and two in total.

In Sweden, the labour market print was strong, with unemployment declining to 8.6% in July from 8.9% in June, slightly below expectations and in line with our forecast. The labour force increased by 0.5% m/m, suggesting the fall in unemployment rate was genuine, while employment rose by 0.8% m/m. The details were even better, with U4 unemployment falling more than the headline rate, although the monthly LFS data is notoriously volatile. Still, given that the Riksbank highlighted high LFS unemployment, Friday's outcome is more noteworthy than usual and broadly erases that negative narrative.

In Denmark, consumer confidence improved in August, rising to -13.1 from -14.7 in July, the highest level since February, although still very low by historical standards. The improvement was mainly driven by households' assessment of their current financial situation, while expectations for the domestic economy one year ahead remained a drag. Business confidence also strengthened, rising to 106.7 in August from 105.3 in July, the highest level since April 2022. The improvement was driven by services and retail, pointing to stronger private consumption ahead. Construction and industrial production remain around the neutral 100 level but appear resilient and still hold potential for further improvement.

Equities: Equities closed higher on Friday, but that does not change the fact that several markets ended the week lower, most notably in the US. The Nordics stood out as one of the strongest regions last week.

The overarching story has not changed much. Four forces are currently shaping equity markets: the oil story around the Strait of Hormuz, the durability of the AI capex buildout, the recently added fear of dollar debasement and, most importantly, exceptionally strong macro data.

The latter remains the key factor keeping equities afloat, as demonstrated again last week and particularly by Friday's PMIs.

The sector performance is revealing in this context. Materials was the best performing sector last week, while Utilities was the worst. In other words, we have not seen a genuine defensive rotation, which is exactly what we would normally expect when macro (and capex) are solid market.

Volatility also remains generally low. The VIX hovered around 15.5 through last week but ultimately ended broadly unchanged.

With macro and earnings data this strong, the resilience of equities should not be underestimated.

Asian markets are mostly lower again this morning, with South Korea again seeing the greatest volatility. US and European equity futures are trading close to Friday's closing levels.

FI and FX: Last week it was all about US Treasuries and Bessent's announcement on increased long-end buyback, prompting a mid-week rally. But as markets digested this and concluded that the structural drivers remain the same, the initial move was reversed and long-dated yields closed the week broadly unchanged. The Dollar weakened on the back of Bessent's announcement but has since then traded more or less unchanged, with EUR/USD currently sitting just below 1.17. In Scandie markets, a dovish Riksbank prompted Swedish rates to outperform EUR dittos and the SEK to weaken. Looking ahead to this week, the key event is the Jackson Hole symposium with Fed Chair Kevin Warsh is set to speak on Friday, whereas in Sweden we look ahead to the Riksbank Minutes and GDP data later in the week.