In focus today
In the UK, the Bank of England will make its rate decision today. We expect the Bank of England to keep the Bank Rate at 3.75%, in line with consensus and market pricing. The vote split is expected to repeat July’s 6-3 outcome of hold versus hike. Governor Bailey has consistently led the hold majority and indicated that he will continue to vote for a hold. Our forecast is for an unchanged Bank Rate until Q2 2027, when the BoE can resume the cutting cycle and deliver another 25bp rate cut. However, near-term risks are to the upside if energy markets do not improve, inflation risks increase and the economy continues to look resilient.
In Japan, the Bank of Japan will decide overnight on its policy rate. We expect the Bank of Japan to hike its policy rate to 1.25%. The move has largely been priced in by investors as market pricing has tightened significantly during recent weeks and we do not expect Governor Ueda to push against that. We expect BoJ will signal a nimbler approach to the tightening pace than the very cautious hiking cycle we have witnessed so far. Anything else will weigh heavy on the yen. Ahead of the meeting, fresh CPI data for August will be released. Core price pressures have shown signs of picking up a bit recently which is also what is reflected in the Tokyo data published earlier this month.
In Norway, we expect that the regional survey from Norges Bank will confirm that growth remains somewhat below trend and that capacity utilization is somewhat lower than last year, but that the economy is far from a recession. The most interesting part in this round will be the wage forecast for this year and next year. In the previous round, companies expected wage growth of 4.5% this year and 4.1% next year, which is very much in line with Norges Bank’s forecast from MPR in June (4.5% and 4.0%). If this is altered in any way in the regional survey, we expect Norges Bank to adjust the wage estimate in the forthcoming Monetary Policy Report correspondingly.
In the euro area, the final euro area inflation figures for August will be released. We expect them to confirm the flash estimates of 3.3% y/y for headline inflation and 2.4% y/y for core inflation. The details will provide further insight into underlying price pressures and the drivers of the surprisingly low services inflation.
In Sweden, we will receive labour market data from the Swedish Public Employment Service (SPES). Weekly SPES data indicates improving labour market conditions, despite the LFS unemployment increase in August yesterday.
Economic and market news
What happened overnight
In US-Canada relations, the idea of Canada becoming an “associate member” of the EU would mean creating a closer formal partnership with the bloc without Canada becoming a full EU member. This could involve deeper cooperation on trade, regulation, security or supply chains, giving Canada stronger links to the European market while staying outside the EU’s institutions. US President Trump has warned that, if the arrangement is considered hostile to US interests, the US may respond by imposing heavy tariffs on the EU.
What happened yesterday
In the US, the Fed delivered a 25bp rate hike with unanimous support, while the updated dots were modestly hawkish relative to expectations. Fed chairman Warsh highlighted that he and the monetary policy committee still see monetary policy as accommodating growth. The new 2026 dot points to one more hike, in line with consensus and our expectation, while the 2027 median signals no further tightening, although eight participants still see rates rising to 4.25-4.50%, consistent with our call. Growth was revised slightly higher for both this year and next, while inflation expectations were broadly unchanged. The statement was largely unchanged, with only a small addition noting that domestic spending has been resilient, and there were no changes to balance sheet policy as expected. The risk assessment was hawkish, as no participants now see risks tilted towards weaker GDP growth or labour markets, allowing the Fed to focus more clearly on upside inflation risks, which nearly all participants continue to highlight. EUR/USD moved modestly lower, consistent with the hawkish interpretation.
Markets reacted by pushing the dollar higher and short-term Treasury yields to their highest level in more than two years, while longer-term yields stayed steady, suggesting investors viewed Warsh’s approach as a credible effort to restore price stability.
Also in the US, data showed strong retail sales in August, following July’s very weak print. Both the Control group (i.e. excl. Autos, Gasoline, Building Materials and Food Services) and headline were stronger than consensus expectations suggested.
In the UK, August inflation was in line with expectations. CPI was 3.1% y/y and 0.5% m/m (Cons.: 3.1% y/y and 0.5% m/m) and the BoE’s forecast of 2.8% y/y. Core inflation came in at 2.6% y/y (Cons.: 2.6% y/y) and the BoE forecast slightly lower 2.5%. Food inflation has been on the BoE’s radar and came in at 0.4% m/m, which is quite normal for the season and lower than BoE forecast, suggesting no clear signs of spillovers yet. Slightly dovish signal for the BoE, probably not enough to move expectations for the rate decision today, but a signal for the meetings ahead.
In Sweden, unemployment rose to 8.9% in August from 8.6% in July, but the increase looks less negative beneath the surface as employment also increased. The Labour Force Survey is volatile, so individual monthly prints should be interpreted with caution, particularly after July’s strong outcome with lower unemployment and higher labour force participation. The rise in August unemployment appears largely driven by a sharp increase in labour force participation rather than weakening labour demand. Overall, the data does not change the view that the labour market is gradually improving, although the monthly volatility warrants a cautious interpretation. Today’s register-based data should provide a clearer picture.
Equities: The Fed has now delivered its first rate hike, yet equities ended the day only marginally lower. It was only after a somewhat hawkish press conference from Warsh that equities came under pressure. As such, the rate hike itself should not be viewed as a surprise to markets, and the muted reaction suggests it had largely been priced in. More broadly, the Fed reaffirmed our view of resilient economic growth and a strong labour market, consistent with the one-notch upgrade to our labour market indicator in the latest Investment Navigator.
The sector performance within equities tells a similar story. At the risk of being somewhat provocative, one could argue that the Fed’s rate hike was not the main driver of yesterday’s market action. Growth stocks outperformed value. Rate-sensitive sectors such as technology and biotechnology beat the market. Meanwhile, banks and energy were among the weakest performers, despite banks typically benefiting from higher interest rates, particularly when rising rates reflect stronger growth prospects, which we argue for.
FI and FX: EUR/USD declined sharply below 1.15 after the Fed’s hawkish rate hike last night with a unanimous decision and 16/18 participants foreseeing another hike before year-end, and 8/18 expected a hike also in 2027. Similarly, US rates rose significantly across the curve with 2Y USD swap rates rising 10bp and 10Y USD swap rates rising 6bp following the decision. Energy prices edged lower yesterday, offering relief to European rates, which saw a broad-based decline. EUR/GBP ended the day higher following a slightly softer-than-expected inflation print, bracing for the Bank of England meeting this afternoon.
