In focus today
In Sweden, preliminary July inflation figures are due today. We expect core inflation at 0.4% y/y, CPIF at 0.6% y/y and CPI at 0.1% y/y. The low annual readings mainly reflect the full July effect of the temporary fuel tax cut and public transport subsidy, as outlined in Sweden: Inflation forecast – July inflation preview, 4 August.
In the US, the July Challenger Report for layoff announcements, Q2 flash productivity growth and weekly jobless claims are set to be released in the afternoon.
In China, trade data will be released overnight going into Friday. Focus will be on whether exports continue to benefit from improving foreign demand, which has been a rare bright spot as domestic leading indicators have weakened over the summer.
Economic and market news
What happened overnight
In the US, Fed Governor Cook (voter, neutral) voted with the majority last week to hold rates steady but said that may no longer be possible unless there are sure signs ahead that inflation is easing, pointing to inflation still being too high and risks to inflation outweighing risks to employment. Meanwhile, San Francisco Fed’s Daly (non-voter) fully backed the July hold, saying the Fed needs more information on whether inflation is driven by temporary supply shocks or is becoming more persistent.
What happened yesterday
In commodities, Brent crude traded in the USD79-81/bbl range as oil markets remained anxious but held on to hopes of a new US-Iran deal to reopen the Strait of Hormuz. Iran said talks with Oman were moving forward and that an agreement had been reached on a shipping route, though safe passage and a broader deal remain uncertain.
In the US, ADP’s National Employment Report for July came in weaker than expected at 44k (cons: 70k), with hiring uneven across sectors. Education and health care added jobs, while leisure and hospitality declined. However, it was noteworthy that ADP reported an uptick in wage growth among workers changing jobs, suggesting that labour market conditions are tightening and workers’ bargaining power is improving despite slow aggregate job growth. At the margin, this is a hawkish signal for the Fed.
Moreover, the ISM services index rose slightly to 54.1 in July from 54.0 in June, below consensus expectations of 54.5. The report was mixed, with business activity, new orders and price indices all rising, while the employment index weakened sharply. Still, the report points to the notion of strong demand, with price pressures continuing to rise.
The contrast among Fed officials remained clear, as Minneapolis Fed’s Kashkari (voter, hawk) said rates should “start slowly moving up”, arguing policy is not particularly restrictive, in contrast to Philly Fed’s Paulson, who yesterday said policy is already mildly restrictive and favoured holding rates steady.
In the euro area, the final July services and composite PMIs were revised only marginally higher from the flash estimates, to 51.7 and 52.0 respectively, confirming a clear improvement in activity conditions compared with June.
In Norway, house prices fell by 1.1% m/m in July, exceeding Norges Bank’s forecast and marking the sharpest monthly decline since March 2020. While this may suggest that higher interest rates are starting to weigh on the housing market, the July CPI figures due on Monday will be the decisive input ahead of next Thursday’s rate meeting.
In China, the private-sector RatingDog services PMI fell sharply to 50.4 in July from 54.1 in June, confirming the declines seen in the official NBS data. The latest reading shows that services growth weakened over the summer both in current demand and new orders. Overall, China’s leading indicators are moving lower, in contrast to the more stable or improving picture across most developed market economies.
Equities: Global equities extended gains for a fifth consecutive session, taking the five-day advance to roughly 5%. That is noteworthy in itself. Moves of this magnitude typically follow periods of elevated volatility and sharp drawdowns, yet this rally has been accompanied by only a modest decline in implied vol. The VIX has eased only from just above 17 to just below 16 over the past five sessions. Performance has been dominated by cyclicals outperforming defensives and growth continuing to outperform value, underlining that this has primarily been a tech driven rally rather than a macro driven one. Yesterday followed the same pattern, although to a lesser extent, with enthusiasm around the tech theme fading through the US session. Consequently, US tech and the Nasdaq underperformed broader markets into the close. This morning, sentiment around the tech trade remains somewhat more cautious. Asia is largely catching up with the late Wall Street moves, producing the now familiar divergence with highly tech sensitive South Korea materially weaker while less tech exposed markets trade firmer. European and US futures are higher this morning, although Nasdaq futures are again marginally lagging.
FI and FX: Broad euro area and US yields ended yesterday’s session about flat, as markets held onto hopes of an interim US-Iran deal to reopen the Strait of Hormuz. An Iranian official said an agreement with Oman was in its final stages, adding that they had agreed on the coordinates for a navigable channel. EUR/USD traded higher towards 1.1550, EUR/NOK was anchored close to the 11.00 level and EUR/SEK fell to 10.95 – the lowest level since mid-June. Markets are now pricing in only 40bp worth of Fed hikes over the coming year, but we think risks are skewed towards more hikes even if energy prices continue moderating. For today, we receive the Swedish July CPI, euro area retail sales figures, the US July Challenger Report and in the afternoon the Fed’s Musalem is set to speak.
