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Japan’s Tokyo CPI data for August shows further acceleration in inflation, with core inflation (excluding food) rising to 2.4% yoy, above the expected 2.2%. CPI core has been climbing steadily every month since hitting a bottom of 1.6% yoy in March.

Core-core CPI, which excludes both food and energy, also ticked up to 1.6% from 1.5%, while headline CPI surged to 2.6% from 2.2%.

These figures are often seen as a leading indicator for nationwide trends. Some economists noted that rise in prices growth was primarily driven by the phase-out of government subsidies on utility bills and a spike in rice prices. Underlying inflation trends may moderate in the coming months as these one-time factors dissipate.

Also released today, Japan’s industrial production rose by 2.8% mom in July, slightly below the expected 3.3%. Looking ahead, manufacturers surveyed by the Ministry of Economy, Trade, and Industry anticipate 2.2% increase in output for August, followed by -3.3% contraction in September.

Retail sales growth also slowed to 2.6% yoy in July, down from 3.7% in June, and below the expected 2.9%.

Additionally, the unemployment rate rose to 2.7% from 2.5%, surpassing expectations of it remaining steady at 2.5%. The jobs-to-applicants ratio, however, edged slightly higher to 1.24.

Bundesbank President Joachim Nagel delivered a strong message overnight, cautioning that a timely return to price stability cannot be taken for granted." He emphasized that ECB must tread carefully and "must not lower policy rates too quickly,"

"We are not there yet. While our 2% target is in sight, we have not reached it," he added.

Nagel highlighted concerns that inflation, although nearing 2% target in late summer, is likely to rebound and remain above target well into 2025 due to persistent increases in service costs.

Addressing the differing views within ECB's Governing Council, Nagel acknowledged the "intense" debates that typically accompany "turning points in the interest-rate cycle".

However, he sought to dispel any notion of broader disagreement, stating, "When making their decisions, monetary policymakers are always faced with some degree of uncertainty. That is why a certain diversity of opinion among them as well as scope for their own judgment are considered features, not bugs."

SNB Chairman Thomas Jordan, who is set to step down at the end of September, highlighted the challenges facing Swiss industry due to the recent strength of the Swiss Franc and weak demand in Europe. Speaking at an event overnight, Jordan emphasized the difficulties these factors pose for Swiss industrial goods, particularly given that Germany and Europe are the primary markets for the country's industry.

"Germany and Europe are the main markets for industry. If the growth is weak there, this automatically affects demand for our industrial goods," Jordan stated. He also acknowledged that the strong exchange rate adds further pressure, noting, "The exchange rate ... does not make the situation easier. It makes it difficult for the industry."

Jordan reaffirmed SNB's commitment to maintaining price stability, defined as an inflation rate of 0-2%, which he described as a "crucial precondition for prosperity." He reiterated that interest rates remain SNB's main tool for achieving this stability, though interventions in currency markets are also on the table if needed.

Looking ahead, markets are currently pricing in a 70% chance of a 25bps rate cut by SNB at their next meeting on September 26, with a 30% probability of a more aggressive 50bps cut.

• Dow Jones index broke resistance level 41280.00
• Likely to rise to resistance level 42000.00

Dow Jones index continues to rise after the earlier breakup of the pivotal resistance level 41280.00 (which stopped the previous waves I, b and iii, as can be seen below).

The breakout of the resistance level 41280.00 continues the active impulse wave iii of the higher impulse waves 3 and (C).

Given the predominant daily uptrend, Dow Jones index can then be expected to rise to the next resistance level 42000.00 (intersecting with the daily up channel from April).

• EURUSD reversed from long-term resistance level 1.1150
• Likely to fall to support level 1.1000

EURUSD currency pair recently reversed down from the major long-term resistance level 1.1150 (which has been reversing the price from the start of 2022).

The resistance level 1.1150 was strengthened by the upper weekly Bollinger Band and by the 61.8% Fibonacci correction of the downward impulse from the middle of 2021.

Given the strongly bearish euro sentiment and the overbought weekly Stochastic, EURUSD currency pair can then be expected to fall to the next support level 1.1000.

Germany data

German inflation is slowing more than expected. According to a preliminary estimate from Destatis, the consumer price index fell 0.1% in August, and annual inflation slowed to 1.9%, compared to 2.3% in the previous month and the 2.1% expected.

Germany released state-specific data later in the day, and the weak readings put pressure on the Euro. The weakness in inflation is further evidence of a limping economy. The data will also weigh on Friday’s Euro-zone CPI estimates. At the start of the week, the average forecast was for a decline from 2.6% to 2.2%, but after the German data, a slowdown to 2.0% would not be too surprising.

The EUR/USD pair fell back to 1.1070 on the news. Since the beginning of the week, we have seen negative surprises in other macroeconomic data from the European economy’s locomotive.

US data

At the same time, macro data from the US continues to be strong. A revised estimate of Q2 GDP growth is 3.0% from 2.8%, and there is a drop in weekly jobless claims from 233K to 231K. Continuing claims rose from 1855K to 1868K. In both cases, these are stronger than expected readings (short-term positive) at historically low levels (long-term positive).

This solid data makes us question the appropriateness of a 50-point cut in the Fed Funds rate in September. However, the futures market is pricing in a 33% chance of such an outcome (67% in favour of a 25-point cut), leaving the potential for dollar strength on a reassessment of expectations. The Fed and the markets are unlikely to make a final decision until after the employment data in early September and the inflation data in the middle of next month.

• EURGBP tumbles, but finds support near 0.8400
• RSI and MACD detect bearish momentum
• But a break below 0.8380 is needed for further declines
• A move above 0.8500 could keep the picture neutral

EURGBP has been in a steady slide since August 8, when it hit the key resistance zone of 0.8625. That said, the pair is currently flirting with the all-important support area of 0.8380-0.8400, a break below which may be needed for the near-term outlook to clearly be considered bearish.

The RSI is lying below 50 and looks to be headed towards its 30 line, while the MACD is running below both its zero and trigger lines. Both oscillators are detecting bearish momentum and suggest that there is a decent chance for the pair to break below the aforementioned key support area.

If so, the bears will find themselves exploring territories last seen two years ago, with the next line of defense for the bulls resting at 0.8255, marked by the low of April 14, 2022. If there is no buying interest there, the slide may extend towards the low of March 7 of that year, at around 0.8200.

On the upside, a rebound from around 0.8400 could take the action towards the 0.8500 barrier, where a break could aim for the 0.8545 hurdle. If the bulls remain in charge, the next stop may be the key 0.8625 ceiling.

To recap, EURGBP has fallen sharply lately, but for the near-term technical outlook to be considered overly bearish, a decisive dip below 0.8380 may be necessary.

Markets

Spanish and German consumer prices rose less than expected in August. Spanish prices were flat in M/M terms with headline CPI falling more than forecast, from 2.9% to 2.4%. German prices even fell by 0.2% M/M to be up 2% Y/Y (from 2.6% vs 2.2% expected). It was the first time since March 2021 that they hit the ECB 2% price goal. The drop is mainly the result of lower energy prices and favorable base effects for goods. Looking at core inflation, the disinflationary trends was much more modest both in Spain (2.7% from 2.8%) and Germany (2.8% from 2.9%). Markets nevertheless welcomed the outcome. The front end of the European yield curve outperforms with the German 2-yr yield currently 2.1 bps lower. Losses were bigger intraday. 25 bps rate cuts at all three remaining ECB meetings still aren’t fully discounted yet. Tenors from 7-yr and longer are 1 to 2.5 bps higher in line with the US move. US yields add 2.5 bps to 4 bps across the curve. The move started after an upward revision to Q2 GDP numbers (3% Q/Qa from 2.8%). Personal consumption increased by 2.9% Q/Qa from an earlier reported 2.3% (and vs 2.2% expected). Weekly jobless claims stabilized for a fourth week running around 230k after their increase to the 250k area in the month of July. Data help putting to bed recent US recession fears. The loss of interest rate support weighs on the single current with EUR/USD slipping from levels around 1.1140 ahead of first regional German CPI’s to 1.1090 currently. EUR/GBP tried to test the 0.84 handle, but without success. European stock markets rallied up to 0.8% for the likes of the EuroStoxx50 which took out the August recovery high in the process and is on his way back to the 5k mark. US stock markets open up to 1% higher for Nasdaq, recovering from the overnight scare (up to -2.5% for futures) in the wake of yesterday’s Nvidia results (-2% from -6%).

News & Views

Swedish GDP growth decreased by 0.3% Q/Q in Q2. Activity was 0.5% higher compared to the same period last year. The decline was less than an initial flash estimate published end July (-0.8% Q/Q). According to Statistics Sweden the setback in the economy was wide, but offset by a positive contrition from net exports (0.9 ppts contribution) as exports increased (1.0%) and imports declined (0.6%). Household consumption fell 0.2% Q/Q. General government consumption increased a small 0.1%. Gross fixed capital formation fell 1.7% Q/Q, mainly due to investments in machinery and equipment and weapon systems. Investments in intellectual property products increased for the second consecutive quarter. Changes in inventories also were an important drag on overall growth (negative contribution of 0.6 ppts). The number of employed persons decreased by 0.2 percent. The number of hours worked decreased by 0.5% in the whole economy and by 0.9% in the business sector. Labour productivity in the business sector increased 0.4%. Household real disposable income increased by 2.0% Y/Y. Poor domestic demand supports the case for further Riksbank easing. The RB last week cut its policy rate from 3.75% to 3.50% and indicated that it could accelerate the pace of rate cuts compared to earlier guidance. A 25 bps rate cut at each of the 3 remaining meetings this year is possible. After a rebound of the krone since the early August sell-off, the Swedish currency today trades little changed EUR/SEK (11.345).

Belgian CPI consumer prices were unchanged from July in August. Y/Y inflation declined from 3.64% to 2.86%. Core inflation (excluding energy products and unprocessed food) stood at 2.73% Y/Y, compared to 3.04% in July and 2.97% in June. In a monthly perspective, the most significant price increases were registered for tobacco (5.4%), private rents (0.6%), non-alcoholic beverages (1.7%), hotel rooms ,(2.1%) clothing (0.5%) and restaurants and cafés (0.3%). However, motor fuels (-3.9%), household appliances(-6.9%), flowers and plants (-4.7%), vegetables (-1.2%) and natural gas (1.6%) had a decreasing effect on the index. The first inflation estimate according to the European harmonized index of consumer prices (HICP flash estimate) for Belgium amounts to 4.5% for August 2024.

Graphs

EU 2y swap rate ticks lower on stronger headline disinflationary trends in Spain and Germany in August

EUR/SEK: tough environment for more SEK-gains despite some euro weakness today

EUR/USD: stronger US data also help the pair away from 1.12 area

EuroStoxx50: (more?) rate cuts are coming!

Daily Pivots: (S1) 1.3151; (P) 1.3208; (R1) 1.3249; More...

GBP/USD is staying in consolidation below 1.3265 and intraday bias stays neutral. Downside of retreat should be contained well above 1.3043 resistance turned support to bring rebound. On the upside, above 1.3265 will resume larger up trend to 100% projection of 1.2298 to 1.3043 from 1.2664 at 1.3409.

In the bigger picture, up trend from 1.0351 (2022 low) is resuming. Next target is 38.2% projection of 1.0351 to 1.3141 from 1.2298 at 1.3364. For now, outlook will stay bullish as long as 1.2664 support holds, even in case of deep pullback.