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Higher for Longer Drive Up Bond Yields

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Today we receive euro area inflation figures for September. We expect a decline in headline HICP to 4.4% from 5.3% in August driven by negative energy inflation, lower food prices, and a downtick in core inflation from 5.3% to 4.8%. The yearly growth rates will decline sharply as the base effects from inflation reducing government subsidies in 2022 and statistical distortions that kept inflation elevated over this summer fades. Yet, we expect the underlying momentum of inflation to remain high at 0.3% m/m and 0.4% m/m in seasonally adjusted headline and core inflation, respectively.

In Norway, unemployment figures are published.

In the US, we get PCE inflation figures for August. We have already received the CPI print for August but the PCE print should attract some attention as it is the Federal Reserve’s preferred inflation measure. We also receive US real private consumption growth volume which we expect to land around zero or even slightly negative.

China releases PMIs for September over the weekend before going on holiday all of next week (Golden Week). For PMIs, we look for a slight further increase in the NBS manufacturing PMI whereas the Caixin PMI manufacturing may slip back after a stronger reading in August. The service PMIs are also worth keeping an eye on as a gauge of consumer spending.

In the UK, we receive the final 2023Q2 GDP figures.

The 60 second overview

There is positive sentiment in Asian equity markets this morning, following yesterday’s positive sentiment in US and European equity markets despite the rising yields. The move in Asia is supported by optimism regarding spending in China during the “Golden Week” holiday.

The market is looking for a confirmation of the soft landing in the US economy from today’s US data personal spending and income for August as well as a decline in the core-PCE that is one of Fed Chairman Powell’s preferred measures of inflation. This should be supportive for the Federal Reserve being on hold even though we are pricing out some of the rate cuts for 2024 and 2025 as central banks are “higher for longer”.

The potential US government shut-down is an additional factor creating uncertainty regarding the economy as stated by another Fed official, and would keep the Fed pausing.

We have several speeches by ECB members today and the market will be watching for comments on monetary policy.

Equities: Global equities were higher yesterday driven by US and Europe. Many moving parts – and not all moving in the same direction – made yesterday a tricky day for investors. The risk-on was driven by cyclicals and partly growth stocks despite European yields moving higher. Yesterday’s big underperformer, and the only sector lower in the MSCI World Index was utilities. Hence, yesterday was not a one-way train but just as much a small reversal for the part of the market struggling the most in September. In US: Dow +0.4%, S&P 500 +0.6%, Nasdaq +0.8% and Russell 2000 +0.9%. Asian markets are mostly positive this morning with Chinese H-shares leading the way higher and Japan going against the tide. European and US futures are marginally higher.

FI: Furthermore, there is not much “flight to quality” despite the widening of the 10Y BTPS-Bund spread as the Bund ASW-spread is still below 60bp and the German curve continues to disinvert between 2Y and 10Y as the market is pricing out future rate cuts. In the US market bond yields ended lower ahead of today’s inflation data. However, this morning we have seen a modest rise in US Treasury yields in Asian trading hours.

FX: Following six consecutive sessions of gains, the broad USD index fell modestly yesterday. The JPY recovered some lost ground vs the USD with USD/JPY back closer to 149. The SEK continued to perform, whereas the previous NOK rally faded as the oil price rally took a breather yesterday.

Credit: After an otherwise rough week credit spreads saw some relief yesterday where iTraxx Xover tightened 10bp and Main 2bp. Despite the positive tone, Xover has widened 25bp since trading in the new series commenced just over a week ago and Main 5bp above.

Nordic macro

Although the Norwegian labour market is still tight with solid demand for labour and low unemployment we are now seeing slightly slower employment growth, fewer vacancies and a gentle rise in the jobless rate. This deterioration is very moderate, however, and so we expect unemployment to be unchanged at 1.9% (s.a.) in September.

In Sweden, August retail sales is released. After the sharp setback between Q1 2022 and Q1 2023 retail sales has been on a slight upward trajectory and July was up 1% mom. Question is if it is sustainable. In the last NIER survey the depressed confidence among consumers and retailers fell back again. At 09.00, Martin Flodén is scheduled for a speech on monetary policy.

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