Sunset Market Commentary

Markets

August US PCE deflators printed bang in line with consensus. The headline PCE deflator rose by 0.3% M/M and 2.7% Y/Y (from 2.6%). The core PCE deflator increased by 0.2% M/M to stabilize at 2.9% Y/Y. Those numbers fit perfectly in last week’s Fed forecasts as well indicating no unwanted tariff-related inflation surprises for now. Personal income (0.4% m/m) and personal spending (0.6% m/m) numbers were slightly higher than expected and add to yesterday’s vibe that personal consumption is still supporting economic growth. US Treasuries and the dollar were unnerved by today’s figures. US yields lose around 1 bp across the curve while EUR/USD is treading water in the high 1.16-area. US equity futures embraced the goldilocks numbers. German Bunds outperform US Treasuries today, reversing yesterday’s losses without strong driver. The belly of the curve (-3.5 bps) outperforms the wings (-1/2 bps). EUR/GBP holds below the YtD top at 0.8769 ahead of the start (Sunday) of Labour’s annual conference next week. A YouGov projection showed that Labour would drop from 411 to 144 seats if parliamentary elections were held tomorrow. Nigel Farage’s Reform party would come out on top with 311 seats (in 650-seat Chamber).

Next week is a big one in terms of eco data with the only US labour market update (JOLTS Job openings, ADP employment change and payrolls) in between the Fed’s first rate cut since January (September 17) and its next gathering (October 29). The new reaction function of the Fed with more weight to the full employment part of the mandate implies that barring any unexpected huge upward surprises, the deal will be sealed for October (25 bps rate cut). US money market currently attach a 86% chance to such scenario. Visibility on October is one thing, but the Fed will still be navigating under cloudy skies for December. Between its October and December meetings, two monthly labour data series will be released, suggesting that volatility and uncertainty on the outcome of that meeting could be high until the very last moment. Apart from labour figures, monthly ISM surveys for manufacturing and services and consumer confidence will be released as well. At the end of the month (Tuesday), a deadline passes to avoid a US government shutdown. If such shutdown continues through the end of the week, the Bureau of Labor Statistics may have to postpone the release of the payrolls report. In Europe, national CPI numbers (September) will on Monday and on Tuesday set the tone for the EMU inflation figure to be published on Wednesday. The ECB’s firm policy stance (very comfortable at 2%) suggests limited impact from these numbers next week. If any, we see some asymmetric risks for a larger market reaction in case of an upward beat as some market participants still leave the door open for a final ECB rate cut lower somewhere over the next 12 months (33% probability).

News & Views

The ECB’s August consumer expectations survey showed the median rate of perceived inflation over the previous 12 months unchanged at 3.1% for the seventh consecutive month. However, consumers see inflation for the next 12 months at 2.8% from 2.6% in July. The index for 5 years ahead rose slightly (2.2% from 2.1%). While still near 2%, the latter was the highest observation since August 2022. EMU consumers expect nominal income growth (next 12 months) better at 1.1% (from 0.9%), while expectations for spending growth are unchanged (3.3%). Economic growth expectations for the next year are stable at 1.2%. Consumers sees the unemployment rate increasing to 10.7% (10.6% in July). Even so, they see the future unemployment rate to be only slightly higher than perceived current unemployment (10.1%), suggesting a broadly stable labour market outlook. Consumers expect the price of their home to increase by 3.4% over the next 12 months (3.3% in July). Expectations for mortgage rates stayed unchanged (4.5%), but the net percentage of households reporting a tightening (relative to those reporting an easing) of access to credit over the previous 12 months increased, as did the net percentage of households expecting tighter credit conditions over the next 12 months.

The September employment barometer of the German IFO Institute published today indicates companies are increasingly planning to deploy their activity with fewer staff. The index fell to 92.5, from 93.8 points in August, marking the lowest level since June 2020. The Head of Surveys at IFO analyses that “because the upturn has failed to materialize for the time being, many companies are applying the brakes on their headcount.” Job cuts for now tend to be gradual but vacancies are not being filled. The barometer has fallen slightly in industry as vehicle manufacturing and mechanical engineering in particular are planning fewer staff. The indicator fell noticeably at service providers as some companies in the transport and logistics sector have already announced layoffs. The number of employees is construction is stable while trade companies are reducing their workforce perceptibly.