Thu, Dec 01, 2022 @ 12:33 GMT
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High Inflation Not Peaking Yet

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The data highlight today will be the euro area HICP figures for August. Headline inflation will likely rise above the 9% mark, despite policy measures to stem the rise in prices. With underlying inflation pressures still broadening and the latest increase in energy commodity still to feed through, an inflation peak in the euro area is not yet in sight, keeping the pressure on ECB to front-load monetary tightening (see Research: New ECB call – We expect 75bp at the meeting next week, 29 August).

In the US, the ADP employment report will give some early hints for non-farm payrolls released on Friday.

Russia’s Gazprom plans to halt gas flows through the Nord Stream1 pipeline today for maintenance. With lingering uncertainty whether gas flows will resume after three days, volatility in European energy markets will likely stay high.

A speech from Riksbank’s Breman is scheduled for 8:30 CET.

The 60 second overview

European inflation: German CPI inflation ticked higher yet again with 7.9% in August, and inflation would be even higher if it was not for the “Tankrabatt” and the fact that the full impact of electricity and natural gas price rises has not nearly fed through to consumers yet. The numbers will increase again in September when the “tankrabatt” runs out.

US labour market: The US July JOLTs report provided further evidence of strong labour markets, as job openings rose against expectations to 11.2 million, while June figures were also revised higher. Labour demand remains very high relative to the persistent drop in labour supply, and the decline in Conference Board’s August jobs ‘hard to get’ index suggests that overall labour market conditions have likely remained tight over the past month as well. Consumer confidence rebounded, while near-term inflation expectations eased slightly, likely reflecting the recovery in consumers’ purchasing power amid lower gasoline prices. So far we see little signs of US economy being near recession despite the weakness in leading indicators, and another strong jobs report on Friday could tilt the balance further towards a 75bp hike in September (market prices around 70% probability). Atlanta Fed’s Bostic emphasized yesterday, that the exact hiking pace will depend on incoming data, but broadly we continue to expect that Fed will have to keep financial conditions restrictive well into the next year in order to ensure that US economy avoids a more persistent period of stagflation – a message which has been echoed by several FOMC members since Powell’s speech last Friday.

China: Official manufacturing PMIs increased to 49.4 in August from 49.0 in July and thus beat expectations slightly but remains in contractionary territory. The reopening boost is waning and weaker export orders and a continued weak property market weigh on Chinese activity.

Japan: Both industrial production and retail sales beat expectations in July. The former is down 1.0% while the latter is up 2.4% yoy. The Japanese economy still has not recovered fully from the pandemic and a surge in Covid cases is threatening to put a break on particularly the service sector once again in Q3.

Equities: Global equities lower yesterday after a roller-coaster session in Europe. Very positive sentiment at mid-day on the back of lower energy prices. However, this was ruined after too strong data from the US. Although equites were down for the third day in a row, the drivers were not the same and hence rotations very different compared to the Friday and Monday sessions. Materials and energy underperformed together with value while defensive and cyclicals much more balanced. In US Dow -1.0%, S&P 500 -1.1%, Nasdaq -1.1% and Russell 2000 -1.5%. Asian markets mixed this morning after their outperformance yesterday. Both European and US futures are about 0.5% higher this morning.

FI: Peripheral spreads underperformed on a day where core yields ended broadly unchanged in the 10y point. However, yields started lower on the day and it was only after the German CPI figure and hawkish tunes from the ECB governing council members, such as Knot (at our Danske Talks), Wunsch, Muller, Vasle leaning for a quick tightening of likely 75bp next week, that rates rose. Nagel said that recession fears should not delay rate hikes.

FX: EUR rose vis-à-vis USD, GBP and Scandies yesterday as market affirmed ECB pricing after recent hawkish comments and drop in natural gas prices. EUR/USD trades close to parity, EUR/SEK around 10.70 and EUR/NOK 9.80.

Credit: Sentiment in credit markets mirrored other risky assets and also had some catching up from Monday (where CDS indices were closed) to do. iTraxx Xover and Main ended the day 21bp and 5bp wider, respectively.

Nordic macro

In Sweden there is a scheduled Riksbank speech at 08:30 CET where we will hear Anna Breman discuss interest rates under the title “From 500% to -0.5% interest rate – and then what?”. The money market is pricing in a lot of hikes with 75bp for the September meeting and 100bp for November followed by another 85bp in the first part of 2023. Even though we lean toward substantial frontloading, we think this is probably too much.

Danske Bank
Danske Bank
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