Eurozone Inflation Taking Centre Stage ahead of ECB September Meeting

Market movers today

The key release today will be Euro inflation for August. Releases for Germany and Spain yesterday were slightly higher than expected and leaves some upside risks to the number.

Euro unemployment is also due and so far it has continued to keep declining despite softer growth. The question is if this will change now with the service sector showing clear signs of slowing.

Later today we get US initial jobless claims and core PCE deflator for August. The latter is expected to rise 0.2% m/m again, the same as last month. It is clearly lower than seen earlier this year where monthly changes were 0.3-0.4% m/m. In addition to the PCE-release we also get data for US private consumption and personal income. Private consumption has been the main driver of the economic rebound over the summer. The consensus expects very strong growth in real spending of about 0.5% MoM in July.

Overnight we get the private version of China PMI manufacturing from Caixin for August.

The 60 second overview

China PMIs and markets. This morning official August PMIs out of China were a mixed bag. They showed a smaller than expected contraction in manufacturing (rise from 49.3 to 49.7) but also a smaller than expected expansion in services (drop from 51.5 to 51.0). Given the huge importance of China for the global economy – not least in terms of the industrial cycle and global inflation impulses – Chinese news will remain key to follow in the weeks to come amid a faltering recovery. However, this morning’s releases failed to trigger much of a market reaction with Asian indices and global equity futures trading close-to-unchanged territory.

Eurozone inflation. The preliminary inflation figures for Germany and Spain were the main story in markets yesterday. The headline inflation in both Spain and Germany came in higher than expected, and the monthly dynamics in the core measure is still well above 2% on an annualized basis. We also expect this to be the case for the euro area HICP data at 11:00 (CET) today which we expect could add support to the case of a final 25bp rate hike from the ECB in September.

US ADP. In the US, the ADP employment change in August surprised a bit to the downside at 177k (consensus: 195k). As the ADP put it, we are now back to the pace of job creation before the pandemic after two years of exceptional gains. That said, we are still wary that the ADP report has not been a reliable leading indicator for the non-farm payrolls figures which we will get tomorrow.

Equities: Equities were a notch higher in a fairly quiet Wednesday session, driven by US while Europe closed slightly lower. However, cyclicals were in favour in both regions, with sectors such as Technology, Industrials or Consumer Discretionary leading. Also note the strong performance for Nordic pulp lately, with Stora Enso -2% yesterday and +8% the last month. S&P500 closed up 0.4%, Stoxx 600 -0.2% and Nordics -0.7%. Small but mixed moves in Asia while US futures are higher. Chinese manufacturing PMIs rose slightly to 49.7 (from 49.3) but not enough to rock the boat.

Credit: Another very busy day in the primary credit market with a string of high-profile deals. This left secondary activity muted. ITraxx Main was 1bp tighter at 69bp while iTraxx Xover was 3bp tighter at 392bp.

FI: European yields rose yesterday as national CPI prints for August came in stronger than expected. The 10-year German yield was up 8bp following the first German regional inflation prints in the morning, but the move was partly reversed in the afternoon. The implied probability of a 25bp hike at the next ECB meeting in September was unchanged at around 50% at the end of the day. In the US markets, the weak ADP data provided renewed support to the bond market. The 10-year US Treasury yield is now trading close to 4.1% and has declined by close to 25bp since last week.

FX: The last sessions have been characterised by USD weakening on markets scaling back Fed monetary tightening prospects while the Scandies and the CEE cluster in HUF, PLN and CZK have all been among the outperformers amid a “bad news is good news” narrative in markets.