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Daily Pivots: (S1) 161.63; (P) 162.14; (R1) 162.88; More...

Intraday bias in GBP/JPY remains neutral for the moment as sideway trading continues. Corrective pattern from 168.67 would extend for a while. On the upside, break of 163.91 will bring stronger rise to 166.31 resistance. On the downside, below 160.07 will turn bias to the downside for 159.42 and below.

In the bigger picture, up trend from 123.94 (2020 low) is still in progress. Sustained break of 61.8% retracement of 195.86 (2015 high) to 122.75 (2016 low) at 167.93 will be a long term bullish signal, and could pave the way back to 195.86 high. This will remain the favored case as long as 155.57 support holds, even in case of deep pull back.

Market movers today

The data highlight today will be the euro area HICP figures for August. Headline inflation will likely rise above the 9% mark, despite policy measures to stem the rise in prices. With underlying inflation pressures still broadening and the latest increase in energy commodity still to feed through, an inflation peak in the euro area is not yet in sight, keeping the pressure on ECB to front-load monetary tightening (see Research: New ECB call - We expect 75bp at the meeting next week, 29 August).

In the US, the ADP employment report will give some early hints for non-farm payrolls released on Friday.

Russia's Gazprom plans to halt gas flows through the Nord Stream1 pipeline today for maintenance. With lingering uncertainty whether gas flows will resume after three days, volatility in European energy markets will likely stay high.

A speech from Riksbank's Breman is scheduled for 8:30 CET.

The 60 second overview

European inflation: German CPI inflation ticked higher yet again with 7.9% in August, and inflation would be even higher if it was not for the "Tankrabatt" and the fact that the full impact of electricity and natural gas price rises has not nearly fed through to consumers yet. The numbers will increase again in September when the "tankrabatt" runs out.

US labour market: The US July JOLTs report provided further evidence of strong labour markets, as job openings rose against expectations to 11.2 million, while June figures were also revised higher. Labour demand remains very high relative to the persistent drop in labour supply, and the decline in Conference Board's August jobs 'hard to get' index suggests that overall labour market conditions have likely remained tight over the past month as well. Consumer confidence rebounded, while near-term inflation expectations eased slightly, likely reflecting the recovery in consumers' purchasing power amid lower gasoline prices. So far we see little signs of US economy being near recession despite the weakness in leading indicators, and another strong jobs report on Friday could tilt the balance further towards a 75bp hike in September (market prices around 70% probability). Atlanta Fed's Bostic emphasized yesterday, that the exact hiking pace will depend on incoming data, but broadly we continue to expect that Fed will have to keep financial conditions restrictive well into the next year in order to ensure that US economy avoids a more persistent period of stagflation - a message which has been echoed by several FOMC members since Powell's speech last Friday.

China: Official manufacturing PMIs increased to 49.4 in August from 49.0 in July and thus beat expectations slightly but remains in contractionary territory. The reopening boost is waning and weaker export orders and a continued weak property market weigh on Chinese activity.

Japan: Both industrial production and retail sales beat expectations in July. The former is down 1.0% while the latter is up 2.4% yoy. The Japanese economy still has not recovered fully from the pandemic and a surge in Covid cases is threatening to put a break on particularly the service sector once again in Q3.

Equities: Global equities lower yesterday after a roller-coaster session in Europe. Very positive sentiment at mid-day on the back of lower energy prices. However, this was ruined after too strong data from the US. Although equites were down for the third day in a row, the drivers were not the same and hence rotations very different compared to the Friday and Monday sessions. Materials and energy underperformed together with value while defensive and cyclicals much more balanced. In US Dow -1.0%, S&P 500 -1.1%, Nasdaq -1.1% and Russell 2000 -1.5%. Asian markets mixed this morning after their outperformance yesterday. Both European and US futures are about 0.5% higher this morning.

FI: Peripheral spreads underperformed on a day where core yields ended broadly unchanged in the 10y point. However, yields started lower on the day and it was only after the German CPI figure and hawkish tunes from the ECB governing council members, such as Knot (at our Danske Talks), Wunsch, Muller, Vasle leaning for a quick tightening of likely 75bp next week, that rates rose. Nagel said that recession fears should not delay rate hikes.

FX: EUR rose vis-à-vis USD, GBP and Scandies yesterday as market affirmed ECB pricing after recent hawkish comments and drop in natural gas prices. EUR/USD trades close to parity, EUR/SEK around 10.70 and EUR/NOK 9.80.

Credit: Sentiment in credit markets mirrored other risky assets and also had some catching up from Monday (where CDS indices were closed) to do. iTraxx Xover and Main ended the day 21bp and 5bp wider, respectively.

Nordic macro

In Sweden there is a scheduled Riksbank speech at 08:30 CET where we will hear Anna Breman discuss interest rates under the title "From 500% to -0.5% interest rate - and then what?". The money market is pricing in a lot of hikes with 75bp for the September meeting and 100bp for November followed by another 85bp in the first part of 2023. Even though we lean toward substantial frontloading, we think this is probably too much.

All was going well yesterday; equities were in the green, when suddenly the dark clouds gathered and it started raining in the markets. The biggest catalyzer of yesterday’s sentiment reversal was the stronger-than-expected US economic data, which revived the Federal Reserve (Fed) hawks and sent the equity indices lower.

First, the JOLTS data showed that the job opening in the US spiked above 11 million, reminding investors that the US jobs market remains extremely tight, and there are about two jobs waiting for each unemployed worker. That means that the companies should pay higher salaries to get people to work for them, and well, that has an undesirable positive impact on inflation, hence revives the Fed hawks.

Second, the US consumer confidence index jumped in August, that was higher than the most optimistic of the forecasts on a Reuters survey. Improved confidence also means that households could be tempted to spend more money, which goes against the Fed’s will to cool down demand, and ease inflation. So, the latter also boosted the Fed hawks.

And as a result, the S&P500 slumped more than 1%. The 50-DMA, and the 50% Fibonacci level on the summer rally have been pulled out and the index closed the session below the 4000 psychological mark for the first time in more than a month.

Nasdaq slid another 1%, as well. It also cleared the 50-DMA support to the downside, and pulled out the major 61.8% retracement on the summer rally, signaling a stronger bearish momentum for the tech-heavy Nasdaq index.

For both Nasdaq and the S&P500, the tech indicators don’t point at oversold market conditions, hinting that the selloff has perhaps more to deepen in the next few hours.

Although the US futures are again in the positive this morning, we saw yesterday that the winds could rapidly change direction, and the volatility is picking up.

Due today, the ADP report will be one of the key data that investors will be watching in the US. The US economy is expected to have added 200’000 new private jobs in August. A stronger-than-expected figure has power to boost the Fed hawks - as we saw at yesterday’s session, and increase the bearish pressure on equities. A softer-than-expected figure will, however, do little to bring in the Fed doves, given that the Fed wants a tighter jobs market, and it will only be happy to see the number of job additions cool down.

And sorry to say this but

As long as the jobs market remains tight and inflation remains the predominant concern, the Fed will welcome any further slump in equity prices.

Minneapolis Fed President Kashkari couldn’t be clearer when he said on Bloomberg’s Odd Lots that he was ‘not excited to see the stock market rallying after the last FOMC meeting’ , because he ‘knows how committed they all are to getting inflation down’. And somehow, ‘the markets were misunderstanding that’.

Rising inflation also revives ECB & BoE hawks, in vain…?

The German inflation hit an almost 50-year high of 8.8% yesterday, the Spanish inflation was slightly off but still above the 10% mark. The French and Italian will also release their latest update, and we will get the flash CPI estimate in the Eurozone this morning. The number is expected to be around 9%.

European Central Bank’s (ECB) Muller said yesterday that the ECB should discuss 75 bp hike at the September policy meeting , as inflation outlook has failed to improve.

And he is right. There is more pain before relief in Europe. In Germany, the latest CPI figure was relatively softish thanks to government aid, including fuel rebate, and the measures will end soon. The nat gas prices continue spiking as Russia turns off the Nordstream 1 for three-day maintenance, and we doubt that the gas flow will ever be restored again. On the other hand, Gazprom warned the French utility Engie that it would halt deliveries from Thursday because of a disagreement over payments.

If that’s not enough, the euro keeps weakening against the US dollar, making the European imports more expensive. And the EURUSD is struggling to keep its head above water, as the hawkish ECB expectations are being troubled by the recession fears.

Across the Channel, the situation is not more brilliant. If you think that 10% inflation in Europe is excessive, read this: Goldman Sachs warned that inflation in Britain could hit 22% next year if the natural gas prices remain high. Other big banks are not as pessimistic, but their forecasts are not encouraging either. Citi for example sees the British inflation advance past 18%, while the Bank of England itself sees inflation trend to 13%. The BoE hawks are not sleeping in their corner, but Cable is headed toward the 1.15 mark, despite the expectation that the BoE will more than double its policy rate to 4.25% next year! If that’s not capable of giving some strength to the pound, I don’t know what can!

Daily Pivots: (S1) 138.45; (P) 138.83; (R1) 139.41; More....

EUR//JPY's rally from 133.38 is still in progress. Intraday bias stays on the upside for 100% projection of 133.38 to 138.38 from 135.50 at 140.50. Decisive break there will indicate upside acceleration, and raise the chance of up trend resumption through 144.26 high. On the downside, below 137.66 minor support will turn intraday bias neutral again.

In the bigger picture, up trend from 114.42 (2020 low) is seen as the third leg of the pattern from 109.30 (2016 low). Further rally is in favor as long as 134.11 resistance turned support holds, even in case of deep pull back. Next target is 149.76 (2015 high). However, sustained break of 134.11 will be a sign of medium term bearish reversal and turn focus to 124.37 support for confirmation.

Euro is staying as the strongest one for the week, as supported by a chorus of ECB hawks. Markets are starting to price in a 75bps rate hike by ECB next week. For now, the strength in Euro is most apparently only against Sterling, Swiss Franc and Yen. It's kept well in range against Dollar. The next move in Euro would very much depend on August CPI flash to be released today. The greenback is also trying to extend recent rally, but momentum is not too convincing so far. ADP job data today might give Dollar a lift, but the key stays on Friday's non-farm payrolls.

Technically, there are some levels to watch in Euro crosses to gauge if it's truly staging a bullish reversal. The levels include 0.8720 resistance in EUR/GBP (which is still quite far), and 1.4712 resistance in EUR/AUD (which is closer). Also, EUR/CAD is starting to build some momentum to challenge 1.3271 resistance. Considering bullish convergence condition in daily MACD, firm break of 1.3271 will be a strong signal of near term reversal, as least for a sustainable corrective rally towards 1.3713. But of course, rejection by 1.3271 will maintain medium term bearishness.

In Asia, at the time of writing, Nikkei is down -0.51%. Hong Kong HSI is down -0.33%. China Shanghai SSE is down -1.00%. Singapore Strait Times is down -0.53%. Japan 10-year JGB yield is down -0.0005 to 0.227. Overnight, DOW dropped -0.96%. S&P 500 dropped -1.10%. NASDAQ dropped -1.12%. 10-year yield closed flat at 3.110.

ECB Nagel: Larger rate hike reduces risks of de-anchoring inflation expectations

Bundesbank chief Joachim Nagel said yesterday that, "monetary policy must react decisively in order to preserve the credibility of the inflation target. Data from a number of countries shows that frontloading or bringing interest rate increases forward, reduces the risk of a painful economic downturn."

"In my view, a larger interest rate hike reduces the risk of inflation expectations becoming de-anchored," Nagel said. "We should not delay further rate hikes for fear of a possible recession. Inflation rates will not return to the central bank's inflation target on their own."

However, Governing Council member Yannis Stournaras said yesterday that there is "no need to take very large steps" on rate hike. "Gradual normalization will be appropriate."

"In my view, this year, we will see the peak of inflation and a steady deceleration thereafter, inflation will gradually decline in 2023 and converge towards the target in 2024," Stournaras added.

BoJ Nakagawa: laid out three reasons for continuing powerful monetary easing

BoJ board member Junko Nakagawa said in a speech that it's "necessary for the Bank of Japan to persistently continue with the current powerful monetary easing," and she laid out three reasons for that.

Firstly, Japan is "still on its way to recovery" from the pandemic. "As demand remains insufficient compared with supply capacity, a shift in the direction of monetary policy toward tightening would likely drag down the economy and put significant downward pressure on the economic activity of firms and households."

Secondly, current inflation in Japan "differ considerably in terms of degree and the number of items" comparing to those in the US and Europe. The difference is "likely due to the disparity in wage inflation".

Thirdly, the 2% inflation target "needs to be achieved in a sustainable and stable manner". "Even if the higher price of some items pushes up the overall price level to 2 percent, unless household disposable income increases, spending on products and services will decline due to budget constraints." Japan is only "halfway to achieve the price stability target.

Japan industrial production rose 1.0% mom in Jul, auto jumped 12%

Japan industrial production grew 1.0% mom in July, way better than expectation of -0.5% mom decline. The Ministry of Economy, Trade and Industry maintained its output assessment, "fluctuates indecisively" reflecting the ups and downs in production in recent months.

Six of the 15 industries reported output increases while eight declined. The auto industry saw the biggest increase by sector, by 12.0% mom.

Based on a poll of manufacturers, the ministry expects industrial output to grow 5.5 percent in August and rise 0.8 percent in September.

Also released, retail trade rose 2.4% yoy in July, above expectation of 1.9% yoy. Housing starts dropped -5.4% yoy in July, worse than expectation of -3.4% yoy. Consumer confidence improved from 30.2 to 32.5 in August.

NZ ANZ business confidence improved to -47.8 in Aug

New Zealand ANZ Business Confidence rose from -56.7 to -47.8 in August. Own Activity Outlook rose from -8.7 to -4.0. Export intentions rose from -2.7 to 3.9. Investment intentions rose from -2.6 to -2.0. Employment intentions rose from 1.1 to 3.4. Pricing intentions dropped from 74.0 to 70.1. Cost expectations dropped from 91.3 to 90.9. Inflation expectations dropped slightly from 6.23 to 6.13.

ANZ said: "It would make sense that with inflation and wage inflation running so high, the neutral Official Cash Rate is creeping higher, meaning the sting of a given interest rate wears off. Risks are tilted towards the RBNZ having to continue on with OCR hikes next year to cool the economy sufficiently to feel comfortable they're getting on top of the inflation problem.

China PMI manufacturing rose to 49.4 in Aug, contraction continued

China's official PMI Manufacturing rose slightly from 49.0 to 49.4 in August, above expectation of 49.2. New orders ticked up from 48.5 to 49.2. Production was flat at 49.8. PMI Non-Manufacturing dropped from 53.8 to 52.6, above expectation of 52.2. PMI Composite dropped from 52.5 to 51.7.

The data showed manufacturing activity contracted for the second straight month. Also, the sector has been in contraction for five out of the past six months, briefly hitting 50.2 in June.

Looking ahead

Eurozone CPI flash will be the main focus in European session. Germany unemployment and import prices, France GDP revision, and Swiss Credit Suisse economic expectations will also be featured.

Later in the day, US will release ADP employment and Chicago PMI. Canada will publish GDP GDP.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 138.45; (P) 138.83; (R1) 139.41; More....

EUR//JPY's rally from 133.38 is still in progress. Intraday bias stays on the upside for 100% projection of 133.38 to 138.38 from 135.50 at 140.50. Decisive break there will indicate upside acceleration, and raise the chance of up trend resumption through 144.26 high. On the downside, below 137.66 minor support will turn intraday bias neutral again.

In the bigger picture, up trend from 114.42 (2020 low) is seen as the third leg of the pattern from 109.30 (2016 low). Further rally is in favor as long as 134.11 resistance turned support holds, even in case of deep pull back. Next target is 149.76 (2015 high). However, sustained break of 134.11 will be a sign of medium term bearish reversal and turn focus to 124.37 support for confirmation.

Economic Indicators Update

China's official PMI Manufacturing rose slightly from 49.0 to 49.4 in August, above expectation of 49.2. New orders ticked up from 48.5 to 49.2. Production was flat at 49.8. PMI Non-Manufacturing dropped from 53.8 to 52.6, above expectation of 52.2. PMI Composite dropped from 52.5 to 51.7.

The data showed manufacturing activity contracted for the second straight month. Also, the sector has been in contraction for five out of the past six months, briefly hitting 50.2 in June.

New Zealand ANZ Business Confidence rose from -56.7 to -47.8 in August. Own Activity Outlook rose from -8.7 to -4.0. Export intentions rose from -2.7 to 3.9. Investment intentions rose from -2.6 to -2.0. Employment intentions rose from 1.1 to 3.4. Pricing intentions dropped from 74.0 to 70.1. Cost expectations dropped from 91.3 to 90.9. Inflation expectations dropped slightly from 6.23 to 6.13.

ANZ said: "It would make sense that with inflation and wage inflation running so high, the neutral Official Cash Rate is creeping higher, meaning the sting of a given interest rate wears off. Risks are tilted towards the RBNZ having to continue on with OCR hikes next year to cool the economy sufficiently to feel comfortable they're getting on top of the inflation problem."

Full release here.

Japan industrial production grew 1.0% mom in July, way better than expectation of -0.5% mom decline. The Ministry of Economy, Trade and Industry maintained its output assessment, "fluctuates indecisively" reflecting the ups and downs in production in recent months.

Six of the 15 industries reported output increases while eight declined. The auto industry saw the biggest increase by sector, by 12.0% mom.

Based on a poll of manufacturers, the ministry expects industrial output to grow 5.5 percent in August and rise 0.8 percent in September.

Also released, retail trade rose 2.4% yoy in July, above expectation of 1.9% yoy.

BoJ board member Junko Nakagawa said in a speech that it's "necessary for the Bank of Japan to persistently continue with the current powerful monetary easing," and she laid out three reasons for that.

Firstly, Japan is "still on its way to recovery" from the pandemic. "As demand remains insufficient compared with supply capacity, a shift in the direction of monetary policy toward tightening would likely drag down the economy and put significant downward pressure on the economic activity of firms and households."

Secondly, current inflation in Japan "differ considerably in terms of degree and the number of items" comparing to those in the US and Europe. The difference is "likely due to the disparity in wage inflation".

Thirdly, the 2% inflation target "needs to be achieved in a sustainable and stable manner". "Even if the higher price of some items pushes up the overall price level to 2 percent, unless household disposable income increases, spending on products and services will decline due to budget constraints." Japan is only "halfway to achieve the price stability target.

Full speech here.

Bundesbank chief Joachim Nagel said yesterday that, "monetary policy must react decisively in order to preserve the credibility of the inflation target. Data from a number of countries shows that frontloading or bringing interest rate increases forward, reduces the risk of a painful economic downturn."

"In my view, a larger interest rate hike reduces the risk of inflation expectations becoming de-anchored," Nagel said. "We should not delay further rate hikes for fear of a possible recession. Inflation rates will not return to the central bank's inflation target on their own."

However, Governing Council member Yannis Stournaras said yesterday that there is "no need to take very large steps" on rate hike. "Gradual normalization will be appropriate."

"In my view, this year, we will see the peak of inflation and a steady deceleration thereafter, inflation will gradually decline in 2023 and converge towards the target in 2024," he added.