In focus today
In the US, regional manufacturing PMI from the NY Fed and the NAHB housing market index will be released for August. The releases will provide an early read on business sentiment and housing market conditions.
In Sweden, Origo inflation expectations will be published this morning ahead of the Riksbank rate decision on Thursday. 1-year expectations have risen somewhat but remain low, while 5-year expectations have been around or slightly above 2%.
For the remainder of the week, focus turns to UK July inflation and the FOMC minutes on Wednesday. On Thursday, the Riksbank rate decision will be in focus, alongside the ECB minutes. The week closes on Friday with preliminary August PMIs for the major economies and Japan nationwide CPI for July. The euro area PMIs will be particularly interesting after the strong July print.
Economic and market news
What happened overnight
In commodities, Brent crude traded above USD88/bbl Monday morning as Middle East tensions kept supply risks in focus. Israel struck Lebanon over the weekend, while the US is preparing new sanctions on Iran and the interim US-Iran ceasefire expires today. Talks to reopen the Strait of Hormuz show little progress, though reported crude shipments by producers in the Middle East continued through the waterway and Iran-Oman talks appear to be progressing without US participation.
In Japan, preliminary Q2 GDP growth came in weaker than expected at 0.3% q/q (cons.: 0.5%, prior: 0.5%), as private consumption was flat and capital expenditure declined, while external demand supported growth. The print is important for the Bank of Japan (BoJ), as continued solid growth remains a prerequisite for further rate hikes, while the weaker domestic demand details affect the assessment of underlying growth momentum.
In China, the National Bureau of Statistics delayed the release of July activity and house price data to 3.00pm local time from the usual morning release.
What happened over the weekend
In the US, July retail sales came in weak, both in headline and control group terms, with the latter falling 0.4% m/m (cons: 0.3%, prior: 0.4%). Lower gasoline prices as well as weak online shopping and car sales weighed on the print, while restaurants, clothing, furniture and general merchandise were steadier. Hence, the details were not as soft as the headline suggested.
Also in the US, consumer sentiment weakened in August, with the preliminary University of Michigan index declining to 51.0 from 55.2. 1-year inflation expectations edged higher to 4.3% from 4.2%, likely reflecting the modest rise in gasoline prices during the latter part of summer. 5-year inflation expectations remained steady at 3.3%, suggesting anchored longer-term views.
On the wires, Fed’s Goolsbee said he was encouraged by recent CPI reports and supported keeping rates unchanged in July, though more data is needed. Goolsbee downplayed the weak retail sales print as one month of data but noted that persistent weakness in consumer spending or productivity would be concerning.
In the euro area, the second estimate confirmed the preliminary reading of strong Q2 GDP growth at 0.4% q/q and annual growth was confirmed at 1.0% y/y. The release also showed employment rising by 0.1% q/q in Q2, in line with Q1.
Equities: Equities took a breather on Friday after fresh all-time highs in Europe and US earlier in the week. S&P 500 and Stoxx 600 were both -0.2% lower on Friday, and underlying sector rotations also calmed. Tech stocks were mostly lower (both semis and software) along with health care, which have both outperformed the market over summer. It was not an outright risk off session either: Outside energy, traditional cyclicals like materials and industrials were both trading higher on Friday. Risk appetite is visible in Asian markets this morning, with Shanghai and Shenzhen up 1% and US futures also pointing slightly higher.
FI and FX: EUR/USD weakened slightly overnight, extending the move from Friday after the weaker-than-expected US retail sales figures. Expectations of Fed hikes are being reduced, with the market now pricing in only 32bp of rate hikes for the coming year, less than our call of 2x25bp. The Brent oil future is steady compared with Friday’s close, just below USD89/bbl. Focus continues to be on the Middle East after Israel struck Lebanon over the weekend, while the US is preparing new sanctions on Iran and the interim US-Iran ceasefire expires today. The NOK is somewhat stronger overnight, while EUR/SEK lingers just above the 11.00 mark. The ECB’s Lane will speak today and in terms of data the week’s highlight will be the flash PMIs released on Friday.
