In focus today
In the euro area, September flash inflation prints for Germany, France, and Italy will be released. The data will give hints to where the data for the whole euro area will land on Friday.
In the US, August PCE inflation will be released in the afternoon. Headline inflation likely rose from July (0.2% m/m and 3.7% y/y) driven by higher energy prices in August. The US Bureau of Economic Analysis will update its methodology for some PCE subcomponents which should provide relief to core inflation. However, given the strong underlying economy, core PCE could still tick up. We will also receive the final revision of Q2 GDP.
Central bankers are active today as the ECB’s Schnabel and the Fed’s Barkin will both be giving speeches. We will also receive minutes from the Riksbank’s September meeting.
The Riksbank minutes will be published at 9.30 CET. Last week’s rate decision marked a significantly more restrictive shift in communication. None of the members dissented and the focus will be on how they comment on the revised rate path and the shift towards greater inflation concerns going forward.
In Japan, the quarterly Tankan business survey will be released overnight. PMIs suggest the economy has kept a strong momentum in Q3 supported by easy fiscal policy and the competitive advantage of a weak yen. We think back-to-back rate hikes from the Bank of Japan are unlikely and expect the next one in December, but the Tankan survey might suggest the BoJ is behind the curve and thus keep the October meeting live.
Economic and market news
What happened overnight
In China, manufacturing activity returned to growth in September. The official manufacturing PMI published by the National Bureau of Statistics rose to 50.1 from 49.8 in August, ending two straight months of contraction. The independent version of the manufacturing PMI by RatingDog increased to 52.1 from 51.5 in August.
In the US, several FOMC speakers discussed monetary policy yesterday. Most notably, Williams, a permanent voter, struck a fairly dovish tone saying he sees no urgency to hike rates again after the September increase. He also said that if the economy develops as expected, he would likely see only one further hike this year. That is clearly a dovish shift compared with a speech he gave last week. Going into the September meeting, we thought Williams would vote for unchanged rates but were surprised that he voted in favour of a hike. Now he once again shows a dovish tilt. Markets reacted by pulling back rate expectations for the October meeting, from pricing in around +17bp to around +13bp. The coming days bring a string of key data – PCE today, ISM tomorrow and the jobs report on Friday – that will determine whether the Fed will lean towards a hike already in October.
In commodities, Brent crude futures are trading above USD 103/bbl, up slightly in the session but well below this week’s peaks. According to Bloomberg reporting, crude oil flows from the Persian Gulf are back to pre-war level while exports of refined oil products remain well below normal.
What happened yesterday
In the euro area, firm’s selling price expectations remained relatively stable in September despite higher energy costs. Price expectations continued to decline in both retail trade and services which is a dovish surprise as it hints that higher energy costs are not easily passed on to consumers in retail or spreading to services. Industry’s selling price expectations rose after having fallen over the past four months as these are more tightly correlated to energy costs. Overall, the data should give the ECB some comfort and, on the margin, lowers the urgency for the next hike already coming in October. Industry’s business expectations for the coming months also increased markedly in the September survey indicating that the global upswing in manufacturing, not least driven by AI investment, is also affecting Europe.
In Spain, HICP inflation rose to 5.0% y/y in September which was slightly above expectations (cons: 4.9%, prior: 4.6%). Momentum is grinding slightly higher in underlying inflation, but large indirect effects from the energy shock were not visible in the Spanish data.
In the US, both job openings in August and consumer confidence in September came in well below expectations. Job openings declined to 7.079 million (cons: 7.225 million, August: 7.335). Consumer confidence declined much more than expected to 81.9 (cons: 89.2, August: 88.6). The August figures were also revised down. Both the assessment of the present situation and future expectations declined markedly. Inflation expectations ticked up as well, however not to recent highs. Soft and hard labour market indicators continue to send completely different signals on what to expect from Friday’s Jobs Report. The last time continuing jobless claims were as low as today, the unemployment rate was down to just 3.6% (current level: 4.1%). But the last time Conference board’s labour market indices were this weak the unemployment rate was above 6%.
In China, the People’s Bank of China (PBOC) announced it will subsidize interest payments for first-home mortgages by one percentage point from 1 October. They also cut the so-called Pledged Supplementary Lending (PLS) rate by 25bp. The PSL is a lending facility to commercial banks with collateralization. The PBOC also increased lending directed at tech innovation as well as agriculture and small businesses. The subsidy for mortgage payments for first-home buyers is the most influential of the measures and it will provide much needed stimulus to the housing market.
Equities: Global risk sentiment was again weaker on an index level yesterday, down 0.2%. S&P 500 also declined 0.2%, Nasdaq -0.1% and Russell2000 at -0.4%. While oil was lower, now trading at USD103/bbl, weak macro data drove the sour risk sentiment. That said, after three consecutive risk-off sessions, markets are showing tentative signs of stabilisation this morning. Asian equities are broadly higher, led by technology stocks, after gains in US semis helped improve sentiment. US equity futures are also pointing modestly higher.
FI and FX: European bond markets retraced some of their recent slide over yesterday’s session, driven by falling energy prices. Brent crude and natural gas prices declined to about USD 103/bbl and 70 EUR/MWh, respectively. Bund yields declined by 3-5bp across the curve, while OAT yields continued to rise, leaving the 10Y OAT-Bund spread just below 118bp. September HICP inflation for Spain surprised to the topside at 5.0% y/y (from 4.6%, cons: 4.9%), and today we will get similar data from France, Italy and Germany, as well as the August PCE from the US. UST curve steepened, as the 2y yield fell by 3bp after dovish comments from NY Fed’s Williams, while the 30y yield reached its highest level since 2002. Broad USD remained on a strong footing despite a usually USD-negative cocktail of soft US macro, dovish Fedspeak and lower energy prices. JPY also strengthened overnight, and EUR/JPY temporarily reached its lowest level since last November below 178.
