Warsh strikes hawkish tone ahead of Friday's NFP

In focus today

Focus turns to the German flash inflation figures for August, ahead of the euro area release tomorrow. Headline HICP inflation is expected to increase to 3.1% y/y (prior: 2.8%), driven by energy prices. Attention will centre on momentum in underlying inflation, which remained unaffected by the energy shock in the figures from Spain and France last week.

Overnight out of China, we receive the private version of PMI manufacturing for August from RatingDog, following the official NBS PMI released earlier today (see comment below on official index). The index declined to 50.9 in July but stayed above 50, still signalling expansion in manufacturing. We expect a broadly unchanged reading in August, as manufacturing activity continues to be supported by strong investment in high-tech industries benefiting from robust global demand for AI datacentre build-out.

Also overnight, the final S&P Global Japan manufacturing PMI is released and is expected to confirm the flash estimate of 55.1, up from 54.5 in July, where the key takeaway was a further strengthening in factory activity driven by the fastest rise in new orders since January 2018.

The main event this week is the US jobs report on Friday, where we expect nonfarm payrolls at +65k and an unchanged unemployment rate at 4.1%. On Tuesday euro area flash inflation data for August is due, followed by the Reserve Bank of New Zealand and the Bank of Canada rate decisions on Wednesday.

Economic and market news

What happened overnight

In geopolitics, the US struck two rocket launchers on Iran's Larak Island in the Strait of Hormuz, after recently relying mainly on sanctions to pressure Tehran. Iran retaliated with missiles at Jordan, which were reportedly intercepted by US forces. The exchange was limited, but it marks the first US strike on Iran's forces in more than a month and highlights the risk of renewed escalation. Oil prices rose above USD 90/bbl on the news.

China's official NBS manufacturing PMI increased to 49.8 in August (cons: 49.6, prior: 49.2), in line with our expectation of a rebound. The details were also improved, with production and new orders moving back above 50. However, non-manufacturing PMI was unchanged at a weak 49.0, highlighting continued softness in services and construction. Overall, the data points to a still uneven economy, supported by manufacturing and exports but weighed down by weak domestic demand and the property downturn.

What happened over the weekend

In the US, Fed Chairman Warsh struck a notably hawkish tone in his speech at Jackson Hole, reaffirming that the 2% PCE target is "firm" and "fixed" and signalling that more work remains if inflation does not move towards target with sufficient speed. This represents a step away from his July press conference tone, where Warsh had emphasised markets' role in determining the direction of rates. The remarks sent EUR/USD lower. Overall, Warsh's message was consistent with a central banker open to hiking at the next meeting, with September now priced as nearly a coin-flip.

Also on the wires, Fed's Hammack, who voted for a rate hike at the last meeting, struck a hawkish tone, calling for immediate action on rate hikes and warning that waiting risks creating further pain. She expects inflation to end the year around 3%, well above the 2% target, and does not view current financial conditions as restrictive.

Additionally in the US, the BLS published its early estimate of the annual NFP benchmark revision at -79k, covering April 2025 to March 2026. While slightly weaker than consensus, the revision is considerably less negative than in recent years, potentially reflecting the diminishing role of illegal immigration in employment growth.

In the euro area, the European Commission's August Business and Consumer Survey showed a notable improvement, with the economic sentiment indicator rising to 98.4 (cons: 97.5, prior: 97.1). Firms' selling price expectations declined further, extending the retreat from the March-April uptick. However, consumer inflation expectations for the next 12 months increased sharply, suggesting price pressures remain a concern. The market is now nearly fully priced for a 25bp rate hike at the September meeting, although the decline in firms' selling price expectations supports our view that the September meeting will be the final hike for now.

In France and Spain, flash inflation data for August came in broadly as expected. In France, HICP inflation increased to 2.7% y/y (cons.: 2.6%, prior: 2.4%), driven mainly by energy, while core inflation momentum remained muted at around 0.1% m/m. In Spain, HICP inflation increased to 4.5% y/y (cons.: 4.6%, prior: 3.9%), again driven by energy, while core HICP inflation declined to 2.8% y/y from 3.0% y/y with monthly momentum of around 0.2% m/m s.a. The picture across both countries is consistent with inflation being driven entirely by energy and no clear spillover to underlying inflation. Combined with a downward revision to French Q2 GDP growth to 0.0% q/q from 0.2% q/q, the data is marginally dovish for the ECB relative to current market pricing of close to two additional hikes and support our view that the ECB delivers only one further 25bp hike.

In Sweden, GDP growth came in strong at 3.3% y/y in Q2 (cons.: 2.5%) with q/q growth of 1.6%. Domestic demand was the main driver, with consumption up 0.9% q/q and investment up 3.5% q/q. Previous GDP figures were also revised slightly upward, underscoring the strength of the result. While the strong investment growth may weigh on Q3 figures, the overall figures strike a hawkish tone for the Riksbank.

Also in Sweden, the NIER indicator increased to 105.1 in August (prior: 104.6), marking the fourth consecutive increase. Household sentiment strengthened to 98.0 from 97.2, and both the private service sector and retail improved. Manufacturing edged slightly lower but remained at an elevated level of 107.1. Price plans increased in manufacturing and construction, with manufacturing price plans significantly above normal, adding to the hawkish tone of the GDP release.

In Norway, the NAV unemployment held steady at 2.1% s.a. in August, in line with expectations and Norges Bank's June MPR estimate. Therefore, despite continued sub-trend growth, the labour market remains resilient. The details were slightly mixed, with gross unemployment dropping moderately while new vacancies continued to decline.

Also in Norway, retail sales declined 0.7% m/m in July, bringing the underlying trend to -1.3% 3M/3M (prior: -1.4%). The weakness in private consumption seen in last week's Q2 GDP figures therefore appears to be carrying into Q3, likely reflecting lower real wage growth and higher interest rates.

Equities: Global equities ended the week on a more cautious footing after listening to Fed Chair Warsh' speech in Jackson Hole. Following a hawkish repricing in fixed income markets, the S&P500 declined 0.3% and Nasdaq was down 0.5%. The Russell 2000, which is generally more sensitive to rates developments was down 1.4%. Min vol and value stocks outperformed where particularly growth and momentum had a tough session. Vix continued its recent decline and is now at just 14.4. Overnight, Asian markets are in red across the board, and US futures are down 0.3%.

FI and FX: Federal Reserve Chairman Kevin Warsh delivered a hawkish speech on Friday at the Federal Reserve's annual Jackson Hole symposium. He reiterated that bringing down inflation is still the top priority for the Federal Reserve and warned that price pressures remain. The market increased the probability of a hike in September, and the US Treasury flattened from the front end. The dollar strengthened versus both the euro and yen. There has been a modest rebound in the USDJPY, while EURUSD is more or less unchanged this morning. US Treasury yields are more or less unchanged this morning in Asian trade.

This morning the oil price rose as tensions increased between the US and Iran on the back of attacks from the US on Iranian rocket launchers. Brent moved above USD 90.

This week we have another crucial event for the US market with the labour market report for August, which is released on Friday. On top of this we have inflation data from the eurozone. Bank of Canada has a policy meeting on Wednesday, where consensus is for unchanged policy rates. In Scandinavia, there is focus on the Danish central bank as FX reserve data are due to be published on Wednesday. Here the market will look for any FX intervention from the Danish central bank in August.