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Weekly Focus – All Eyes on the ECB Next Week

This week, we published our latest economic forecasts for both Nordic and global economies in Nordic Outlook – Divergent fortunes, 5 September. The outlook for the euro area remains weak, and we think the economy is headed for a slight contraction towards the end of the year. In the US, we have lifted our growth forecast for this year (1.9%) due to more upbeat investment outlook, but still look for clearly below-trend growth towards 2024 on weakening consumption (+0.6%). And while Chinese authorities have recently rolled out increasing number of stimulus measures, we expect growth to remain below the official target at 4.8% in 2023 and 4.2% in 2024.

The divergent outlook was reflected in this week’s mixed data releases as well. Euro area Sentix index signalled further weakening in investor confidence in early September, while China’s Caixin Services PMI confirmed the slowdown in the official NBS measure released earlier. In contrast, US ISM Services index defied weaker signals from PMIs, and rose sharply against expectations (54.5; from 52.7). Notably, the uptick was broad-based across subcomponents, including new orders, employment and prices paid.

The strong reading lifted UST yields, which were further boosted by initial jobless claims falling to the lowest levels since February. The fear of rates staying higher for longer weighed on equity sentiment and EUR/USD. We discussed the recent US labour market data and implications for the Fed in US Labour Market Monitor, 7 September.

Next week, the focus turns to the ECB meeting, where we anticipate a final 25bp hike. Markets remain divided between a hike and a pause, with the implied probability of the former hovering around 35-40%. This week, the Q2 compensation of employees, which is ECB’s key measure for wage growth, continued to grow at a pace of 5.6% y/y, close to Q1 rate of 5.4%. The figure was slightly higher than ECB estimated for 2023 back in June (5.3%). This could provide support to the still elevated underlying core inflation, which we expect to fall below 3% only in H2 2024. Read our more detailed ECB Preview, 6 September and further details on data from Euro Area Macro Monitor, 7 September.

In the US, next week brings the final key data release ahead of the September FOMC meeting, including the August CPI. While the recent uptick in oil prices will likely lift the headline measure by 0.5% m/m, cooling wage pressures should translate into further easing in core services inflation, and we forecast another low core CPI print at 0.2% m/m. While both us and the markets remain convinced that the Fed will go on a pause in September, market pricing implies that the November meeting is essentially a coin-flip between a hike and a pause. The next meeting will provide some interest cues in the form of updated rate projections however, and a low CPI print could tilt some of the FOMC participants to revert their June call for one more hike later in the year.

Other data releases include US retail sales, where early card transaction data is pointing towards slowing real spending growth, especially when considering the higher gasoline prices. The Fed will keep an eye out for the preliminary University of Michigan survey as well, and if the declining trend on inflation expectations continued into September.

Full report in PDF.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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