Weak jobless claims leave a tricky backdrop for the Fed

In focus today

• In the US, rounding off this week's series of inflation releases, the University of Michigan's preliminary September consumer sentiment survey is due for release today. Markets will focus on consumers' inflation expectations, which have remained clearly elevated amid tariff concerns. 
• In China, early Monday brings the release of the monthly data dump, covering key areas of the economy. Focus will again be on retail sales and housing, which have weakened in recent months in contrast with government goals. We look for data to remain weak, as confidence is low and no decisive new stimulus has been introduced to lift household demand.
• Have a great weekend!

Economic and market news

What happened yesterday

In the US, August CPI surprised slightly to the topside, with headline inflation coming in at 0.4% m/m SA (forecast: 0.3%, prior: 0.2%) and core inflation at a 'high' 0.3% m/m SA (forecast: 0.3%, prior: 0.3%). Inflation was primarily driven by housing and food prices, while core goods and other services remained steady. There were no strong indications of tariff pass-through in the data. Read more in Global Inflation Watch - Tariff pass-through still in progress, 11 September. Initial jobless claims rose to 263k (prior: 237k) - the highest level since 2021. Over half of the uptick stemmed from Texas, while declines in other large states suggest a potential one-off. The combination of rising claims and increasing inflation presents a tricky backdrop for the Fed.

In the euro area, the ECB kept policy rates steady with the deposit rate at 2.00%, as widely expected. Staff projections revealed a dovish twist, with the 2027 inflation forecast revised down to 1.9% y/y (prior: 2.0%) and core inflation to 1.8% (prior: 1.9%). However, President Lagarde downplayed the revisions at the press conference, highlighting a balanced growth outlook for the first time since September 2023. Markets reacted hawkishly, and we expect no policy rate changes from the ECB in 2025 or 2026. Read more in our ECB Review - Confident despite inflation below target in 2027, 11 September.

In Norway, the Regional Network Survey aligned with expectations. Capacity utilisation remained unchanged at 35%, reducing the risk of upward pressure on the rate path. While the labour shortage edged up from 23% to 25%, its impact was diminished by stable employment prospects and unchanged wage growth expectations of 4.5% this year and 4.0% next year. Growth was also steady, with the production index at 0.4% for both this and next quarter, matching forecasts. Overall, the report suggests domestic demand will not influence the rate path, keeping Norges Bank on track for a September rate cut.

In Sweden, final inflation details for August aligned broadly with flash estimates. Clothing prices were slightly higher and furniture prices somewhat lower, while key seasonal components (car rentals, air tickets, package holidays) followed the expected large m/m declines. However, these declines were insufficient to meet the Riksbank's forecast, slightly denting their "summer inflation" narrative. That said, the Riksbank may find reassurance in the potential for further seasonal declines in September. We still expect the Riksbank to hold rates steady in September, with a 25bp cut likely in November.

Also in Sweden, the PES unemployment rate ticked slightly lower to 7.0% (prior 7.1%).

Equities: Equities extended their surge yesterday with fresh ATHs across several indices. Importantly, the rally was not narrowly driven but broad-based (tech underperforming) and unsurprisingly led by cyclicals.

The equity narrative is narrowing further around the Fed. With just over three months left of the year, markets now price close to three consecutive cuts one at each remaining FOMC meeting. This remains the key driver for equity sentiment, regardless of whether the cuts are growth- or inflation-driven, which in itself is not entirely comforting. Still, experience shows that fighting this type of momentum is costly as long as the fundamental backdrop remains intact. As flagged yesterday, the investor focus was not on the ECB but on US data. In the US yesterday, Dow +1.4%, S&P 500 +0.9%, Nasdaq +0.7%, Russell 2000 +1.8%. Asian markets are higher this morning, European futures point higher as well, while US futures trade broadly flat.

FI and FX: It was a very eventful session yesterday in both global and Scandi FI and FX markets. Returning labour market concerns in the US dominated higher-than-expected CPI which in turn drove a further bullish flattening of the USD swap curve with USD 2s10s now back to 21bp. The EUR curve also flattened amplified by ECB's hawkish hold which also aided EUR/USD back above 1.17. In the Scandies markets are now speculating whether Norges Bank could refrain from cutting rates next week which in turn has contributed to also sending EUR/NOK to a new multi-month low. A stronger NOK has also spilled over to SEK with EUR/SEK revisiting the low 10.90s.