In focus today
In China, the monthly data batch will be released overnight containing retail sales, housing, industrial production and investments. We look for more of the same with still weak retail sales growth, but decent industrial production driven by exports and AI infrastructure investments. We will especially watch the housing data, where there have been tentative signs of stabilisation in home sales and easing declines in home prices lately.
In Sweden, the final inflation figures and details are released today. The preliminary outcome showed core inflation at 0.5% y/y, CPIF at 0.7% y/y and CPI at 0.3% y/y. We expect the final figures to confirm the preliminary ones. The preliminary details showed that both goods and services were lower than expected.
For the rest of the week, the main event will be on Wednesday’s FOMC meeting, where we call for unchanged rates, but a 25bp hike is clearly also possible. Several other rate decisions are also due this week. On Thursday, we expect the Bank of England to keep the Bank Rate unchanged at 3.75%. On Friday, we expect the Bank of Japan to hike its policy rate to 1.25%. On the data front, we have the monthly data batch from China and Germany’s ZEW index on Tuesday.
Economic and market news
What happened overnight
In commodities, Brent jumped around 3% at opening as escalating geopolitical tensions raised concerns over global supply. Brent moved above USD 107/bbl after new strikes on Saudi Arabia, attacks on vessels near the Strait of Hormuz and the shutdown of Saudi Arabia’s East-West pipeline. The pipeline is a key export route that allows crude to bypass the Strait of Hormuz, and its closure could put up to 4% of global oil supply at risk. At the same time, rising risks regarding the Houthis around the Bab el-Mandeb Strait have added concerns over another important transit route. With a planned Gulf-Iran meeting in Oman postponed, markets are likely to remain focused on the risk of further disruption and whether the East-West pipeline can be brought back online quickly.
What happened over the weekend
In the US, the August CPI report came in mixed but with a hawkish tilt. Headline inflation was in line with expectations at 3.4% y/y and 0.4% m/m SA, reflecting the expected boost from higher retail gasoline prices. Core inflation eased to 2.4% y/y from 2.5%, slightly below consensus, but the monthly core print rose to 0.3% m/m SA versus 0.2% expected. The details were less reassuring, with core services stronger than our initial forecast and shelter ticking up, while core goods were softer. We think the report challenges our call for the Fed to leave rates unchanged at this week’s meeting, as the stronger services momentum may be hard for policymakers to look through.
Also in the US, leading AI executives have called for a slower pace of development amid mounting safety concerns. Anthropic CEO Dario Amodei urged companies to slow advances in model capabilities, while OpenAI’s Sam Altman and xAI’s Elon Musk said they agreed. Altman also described the risk of human extinction from AI as “unacceptable” and said OpenAI will not pursue an IPO this year, citing safety considerations. The comments highlight growing concern within the industry that the most advanced AI systems may require stronger safeguards before development accelerates further.
In the UK, July activity data surprised clearly to the upside, with monthly GDP rising 0.4% m/m versus expectations in the -0.1% to 0.1% range. The improvement was driven mainly by a strong service sector, but production and construction also improved modestly from June. Industrial production rose 0.2% m/m and 0.6% y/y, ahead of expectations, while manufacturing increased 0.9% m/m and 2.6% y/y, also stronger than expected. The print reinforces the message from the recent PMI rebound that UK growth momentum is more resilient than feared. Read our preview ahead of the Bank of England meeting: Bank of England Preview – On Hold Amid Aggressive Market Pricing, 11 September.
Equities: Equity resilience meets a new AI concern. Equities advanced on Friday, leaving the broader market only around 1% lower for the week. The gains came despite a CPI print marginally on the hotter side, which pushed the US front end higher and increased the implied probability of a Fed hike this week.
The ability of equities to advance against this rates headwind was noteworthy. Cyclicals outperformed defensives over the week, while the VIX closed below 16. The resilience becomes even more striking when considering that front end yields rose by approximately 25bp in both the US and Europe last week, while oil gained around 10%. In other words, rates moved higher partly for precisely the wrong reasons from an equity perspective. Yet equities declined by only 1%, volatility remained compressed and cyclicals outperformed.
This suggests that investors remain acutely aware of the exceptionally strong underlying economy and earnings backdrop.
This morning, Asian equities are trading lower, led by IT, with European and US futures pointing in the same direction. The market is beginning to engage with what we call AI Fear 3.0. Meanwhile, oil has moved back above USD 108 per barrel following attacks on key pipelines in the Middle East and the postponement of the meeting between the Gulf states.
FI and FX: EUR/USD traded modestly lower to 1.16, and US yields rose throughout Friday’s session with 10Y Treasuries edging closer to our long-held target of 5.00% after Friday’s US CPI report. In European space, the EUR swap curve twist steepened with the short end catching a breather after the significant rise in yields Thursday following the ECB meeting. The SEK faced major headwinds last week with lower-than-expected inflation, a hawkish ECB and increased geopolitical tensions all weighing on the Krona. Brent is trading around the 107 USD/bbl mark as little signs of easing tensions in the Middle East remain.
