Hawkish Holds Expected From Norges Bank and the Riksbank

In focus today

In Sweden, we expect the Riksbank to leave the policy rate unchanged at 1.75% but shift to a more hawkish stance compared with the June MPR. We expect it to signal that a rate hike is likely towards the end of the year, with the rate path levelling out around the midpoint (2.25%) of the Riksbank’s stated interval for neutral (1.5%-3.0%). Although a rate hike seems unlikely, given the pressure on the SEK, it cannot be completely ruled out.

In Norway, we expect Norges Bank to keep the policy rate unchanged at 4.25%, but signal that further hikes may be needed. However, this is a very close call, with market pricing marginally favouring a hike and consensus split 50/50. The risk to our view is that the committee remains focused on anchoring inflation expectations, as cost inflation is high and rising energy prices pose an upside risk to inflation further ahead. In that case, Norges Bank may raise the rate while maintaining a weaker tightening bias.

In Switzerland, we expect the SNB to keep the policy rate unchanged at 0%, well in line with consensus and market pricing. We do not expect the SNB to hike policy rates the coming year as we do not think the recent rise in energy prices will trigger a broad-based rise in inflationary pressures. Markets will focus on any pushback on market pricing of 60bp worth of hikes and change in language regarding the CHF.

In Germany, the Ifo business climate indicator for September is due. We expect the assessment of the current situation to rise markedly following yesterday’s strong PMIs, while expectations are likely unchanged due to the recent rise in energy costs.

In geopolitics, Chinese President Xi Jinping will meet US President Donald Trump in Washington, their second summit this year. An extension of the trade truce, and AI governance are expected to be on the agenda. A key goal for the US is to avoid Chinese restrictions on rare earth minerals, while China wants the US to refrain from new tech sanctions. Xi will likely reiterate the high priority that Beijing places on Taiwan, which remains the biggest risk in the relationship. We expect few concrete results, but regular meetings help keep the relationship stable, even as the rivalry continues beneath the surface.

In the US, Fed’s Williams, Hammack and Paulson, all voters this year, are on the wires. Hammack has been one of the most outspoken about the need for rate hikes sooner rather than later and already voted in favour of a hike in July.

Economic and market news

What happened overnight

In Japan, the flash PMIs pointed to slower but still solid growth in September, with all three PMIs still above 50. The composite PMI fell to a four-month low of 52.5 from 53.5 in August, as the manufacturing eased to 54.1 from 54.9 and the services PMIs to 51.6 from 52.5. In manufacturing, growth in both output and new orders slowed, although exports orders remained strong. Cost pressures eased slightly but remain elevated due to the weak yen and higher energy prices, which could keep pressure on the BoJ to tighten further.

In commodities, Brent crude is trading around USD 102/bbl this morning after rebounding yesterday from its recent decline, as renewed tensions around Iran revived supply concerns. Iran’s President told the UN that the Strait of Hormuz cannot remain freely accessible while sanctions are in place, while Secretary of State Rubio said Iran had fired at commercial ships. Tehran also set out its conditions for a deal, including an end to US military and economic pressure and the release of frozen assets, pointing to limited prospects of any relief in the conflict, despite this week’s talks.

What happened yesterday

In the euro area, the composite PMI surprised clearly to the upside, rising to 53.1 in September (cons.: 51.7, prior: 52.0), the highest level in more than three years. Services drove the increase, climbing to 53.0 (cons.: 51.4, prior: 51.6), while manufacturing held steady at 52.7 (cons: 52.6, prior: 52.7). All price indices rose, and services output prices reached their highest since early 2024, suggesting that higher energy costs could be spreading, although the level itself is not alarming. With growth and inflation pointing in the same direction, the print looks hawkish for the ECB, and short-end rates rose markedly on the release. We expect two further hikes, and energy prices over the coming month will determine whether the first comes as early as October.

In the US, the flash PMIs also came in well above expectations, with the composite increasing to 58.4 in September from 56.0 in August. Manufacturing picked up to 57.0 from 53.9, with new orders, output and employment all higher, while services strengthened to 58.7 from 56.5. The details reveal that services input prices are rising at the fastest pace since November 2022, pointing to price pressures that could be hard to explain by energy alone. Overall, the release was hawkish as in the euro area, and it pulled EUR/USD below 1.14, as markets priced in a 70% chance of another Fed hike in October.

On the wires, Fed’s Barr said further hikes are likely needed to ensure a timely return to 2% inflation, noting that the risks to the inflation target have increased while risks to the labour market have eased. Barr did not say when but struck a firmer tone than earlier.

In the UK, the composite PMI lost momentum in September, as services, the main driver of the expansion, fell to 51.7 from 52.5, while manufacturing edged up from 51.7 to 52.0. Price indices moved higher, but only modestly, with the composite output price index rising to 58.3 from 57.0, still well below spring levels. Overall, the data came in on the dovish side of consensus, in contrast to the euro area and the US.

Equities: Global risk sentiment was sour yesterday with equities 0.5% lower. All sectors except energy were lower. S&P 500 declined 0.8% with Nasdaq and Russell 2000 down 1.1 and 1.8% respectively. Concerns about the diesel price in the US set the sour risk tone for yesterday’s trading session in equities in the morning, with little focus on the European PMIs. The energy sector rose 0.1%, with tech and consumer staples recording minor declines. Consumer discretionary, utilities and communication services were amongst the worst performers. Overnight both Asian indices as well as the US/European futures are in red.

FI and FX: Treasuries sold off sharply on Wednesday in a bear-steepening move, with yields surging to their highest levels in nearly two decades. The 10Y closed at 5.11% (+15bp), the 30Y at 5.41% (+10bp), and the 2Y at 4.89% (+14bp). European bonds sold off sharply on Wednesday, in a bear-flattening move driven by the combination of surging oil prices, strong PMI data, and a significant widening in French sovereign risk. Yesterday’s superheated US flash PMIs triggered a sharp tightening in financial conditions during the European evening. Both equity and bond markets sold off, and USD strengthened across all other G10 currencies. Today, we expect the SNB to keep the policy rate unchanged at 0%, well in line with consensus and market pricing. The krona underperformed yesterday, with EUR/SEK near 11.30 and USD/SEK moving above 9.90. EUR/NOK still hovers around 10.80 ahead of today’s Norges Bank decision.