Weak NFP, yet lower unemployment rate

In focus today

In Norway, we expect core inflation to have risen to 2.9% in July, driven by a partial rebound in information and communication technology, as well as airline tickets. Lower food inflation should pull slightly in the opposite direction. If we are correct, core inflation would be 0.4pp lower than what Norges Bank assumed in the monetary policy report in June. In that case, we would expect Norges Bank to stay on hold on Thursday but retain a tightening bias.

In Denmark, July inflation data is due. Headline inflation has held steady at 1.9% y/y for the past two months, and we expect it to remain unchanged. Base effects from last year's elevated food and electricity prices may exert downward pressure, offset by seasonal upward pressure from the higher weighting of holiday centres and camping sites in July.

In the euro area, the Sentix Investor Confidence indicator is due. The index rose sharply in in July, marking the third consecutive monthly improvement, driven by rising expectations. Today's release will provide a read on whether momentum continues.

The Swedish week starts today with the Production Value Index (PVI). The PVI is typically of particular interest ahead of the GDP indicator release, but with the strong Q2 GDP indicator already published, today's figures are unlikely to trigger significant market reaction.

Overnight, we expect the Reserve Bank of Australia (RBA) to maintain its cash rate unchanged at 4.35%, in line with consensus and market pricing. After three rate hikes during the spring, RBA is unlikely to tighten its policy rate much further in the coming meetings either. 

Looking ahead, the main event this week is the Norges Bank monetary policy meeting on Thursday. On Wednesday, US inflation data will be in focus, followed on Thursday by UK Q2 GDP estimates. The week closes on Friday with the second release of euro area Q2 GDP, including details. Geopolitical developments in the Middle East and its spillover into commodities remain an ongoing point of attention throughout the week.

Economic and market news

What happened over the weekend

In the US, the July jobs report came in on the weak side with nonfarm payrolls coming in at -23k (cons: +80k, Danske: +70k) and cumulative revisions for May-June firmly negative at -103k. The unemployment rate nonetheless fell to 4.1% (cons: 4.2%, Danske: 4.2%). At the same time, the labour market participation rate declined to 61.4%, which is the weakest level since February 2021. We do not think this report is as unambiguously dovish as the initial moves in UST yields and USD FX implied, leaving the Fed in a difficult position balancing below-expectations job growth against a still-declining unemployment rate. Fed's Barkin's initial commentary acknowledged the weakness in the labour market data, while pointing to continued resilient corporate earnings.

In China, both consumer and producer price inflation eased more than expected in July. CPI fell to a six-month low of 0.5% y/y (cons.: 0.8%, prior: 1.0%), while PPI slowed to a three-month low of 3.5% y/y (cons.: 3.9%, prior: 4.1%). Lower oil prices and soft domestic demand were the primary drivers. While stronger fiscal spending has been pledged by top leaders on infrastructure projects, the impact on inflation is likely to be felt with a lag.

In Norway, manufacturing production fell 1.0% m/m in July, pulling the underlying three-month trend down to 0.7%. The slowdown was largely driven by oil-related industries, while mainland industries held more stable. Despite the monthly dip, manufacturing remains a relative bright spot in an economy where rate-sensitive sectors such as retail trade and construction continue to face headwinds.

In geopolitics, there were signs of progress towards an Iran-Oman shipping agreement on reopening the Strait of Hormuz, with Iranian Foreign Minister Araghchi confirming that talks with Oman are in their final stages. However, he was explicit that a deal would not automatically translate into a reopening of the waterway. Furthermore, Tehran tied a full reopening to further US concessions, including US force withdrawals, war damage compensation and sanctions relief.

Equities: Global risk sentiment ended last week on a strong note, even though the trigger was hardly unambiguously positive. Equities liked the decline in front-end yields on the back of the NFP report and was less focused on potential growth implications that the reading may have. The S&P 500 rose 0.6% on Friday, ending its best week since April with a weekly gain of around 3.6%. Nasdaq was up 1.2% on Friday and the Philadelphia Semiconductor Index rose 3%. The S&P 500 even reached a fresh record-high, which is striking given that the same week had included both AI capex concerns and a memory-chip sell-off, and what seemed most like Newton's cradle when it comes to geopolitics. Within equities, both cyclicals and defensives rose, yet the former outperformed the latter by 0.9pp on Friday. Materials, consumer disc and tech was aat the top of the table rising about 1.3-1.5%, while Financials and Energy declined. Overnight, Asian equities are in green, with US futures mixed.

FI and FX: The USD took a hit on Friday and the US jobs report significantly disappointed expectations. The USD lost ground against the rest of G10 currencies. EUR/USD rose briefly to 1.1581 - the highest level in almost two months and USD/JPY temporarily fell below 157. Short-term US interest rates dropped along with the USD. The 2Y swap rate fell more than 6bp after the release of the jobs report and ended the day down around 3-4bp. Consequently, the market now discounts 11bp of hike from the Federal Reserve at the next meeting in September. The Scandi currencies were broadly unchanged vis-à-vis the EUR on Friday, i.e. both EUR/SEK and EUR/NOK traded below the 11.00 mark. Short-term NOK interest rates fell slightly on Friday and ahead of the Norges Bank meeting this week dragged down by the drop in US interest rates.