Source: Poundsterlinglive

In focus today

Today, the ECB is widely expected by both analysts and markets to deliver a 25bp rate cut. The moderation in the labour market and economic activity since the June meeting should lead to a further increase in the confidence of the disinflationary process being on track, in particular given the slowdown in wage growth. For more details, please see ECB preview – Dialling back, but pace uncertain, 5 September.

In Norway, the Regional Network survey is released, providing insights into capacity utilisation, which could be decisive for Norges Bank’s message on 19 September. Although Norges Bank advised markets in June against speculating on rate cuts this year, recent domestic and global developments have considerably increased the probability of a rate cut in 2024. If capacity utilisation metrics turn over significantly, we stand ready to adjust our current call for the first Norges Bank rate cut to not come until March 2025.

In Sweden, CPI for august is released. We expect CPIF inflation to drop significantly to 1.1% y/y in August, 0.6 pp. below the Riksbank’s forecast. Our forecast for CPIF excl. energy at 2.1% y/y aligns closely with the Riksbank’s view. If correct, focus is on how the Riksbank will handle such an outcome in its monetary policy.

Economic and market news

What happened overnight

In Japan, wholesale inflation for August was lower than expected at -0.2% m/m and 2.5% y/y, compared to consensus of 0.0% m/m and 2.8% y/y. The surprise was due to the yen’s rebound, which eased import cost pressures. The slowdown, expected to impact consumer prices in the months ahead, could influence the timing of the Bank of Japan’s (BoJ) next rate hike. Moreover, this morning, the hawkish BoJ member Tamura stated that rates must rise to at least 1% by late next year, as the likelihood of achieving the 2% inflation target sustainably has improved. Tamura’s comment, the first to specify a target rate, follows other BoJ members advocating for continued hikes despite market turmoil.

What happened yesterday

In the US, headline inflation in August was close to expectations at 0.2% m/m SA and 2.5% y/y (cons: 0.2% m/m SA, 2.6% y/y). Core inflation was slightly higher than expected at 0.3% m/m SA (cons: 0.2%), while the yearly figure matched expectations. The modest upside surprise was mostly driven by shelter prices, while price pressures elsewhere in the services sector, in core goods as well as in food and energy were close to expectations. Shelter, and more precisely the contribution from owners’ equivalent rent (OER) rose to the highest level since January. However, it should be noted that shelter CPI lags changes in the actual rental/real estate market by 10-11 months, implying that this should not be seen as a sign of re-accelerating inflation pressures. Hence, the print does not derail the Fed from cutting rates next week but supports our case of a 25bp cut. After the release, markets priced the odds of 25/50bp cuts at 85%/15% in favour of a smaller move.

Kamala Harris emerged as the stronger candidate in the presidential debate against Donald Trump. Harris conveyed a more forward-looking vision, while Trump mainly focused on criticizing the current administration and lacked clarity on his own initiatives. Republican strategists noted that while Trump’s performance was not seen as a major setback, his re-election bid appeared more uncertain. A YouGov flash poll showed 43% of viewers saw Harris as the winner, compared to 28% for Trump, with 30% undecided.

Harris now also seems to be the clear favourite according to prediction markets. However, the race remains close, particularly in the swing states. For details on the US election, see our US Election Monitor, 6 September, which we plan to update bi-weekly until election day.

The markets reacted to the debate by sending the USD and yields slightly lower, suggesting that expectations of Trump pursuing more expansionary fiscal policies and protectionist measures remain intact. Yesterday’s price action likely provides a good gauge for how markets may react to election news going forward, though the longer-term implications are less clear-cut.

In the UK, the monthly GDP figure for July was weaker than expected at 0.0% m/m (cons: 0.2%, prior: 0.0%), signalling an economy starting to lose steam, while the 3M/3M measure printed at 0.5% (cons: 0.6%, prior: 0.6%). The downside surprise was broad-based, driven by declines in industrial and manufacturing production as well as construction, while services continued to contribute positively. That said, it should be noted that this data is of volatile nature, and hence that the topside risk to demand is still in place – in line with the Bank of England’s expectation.

Equities: Global equities rose yesterday, led by US large-cap, cyclical growth stocks. This movement was prompted by a slightly higher-than-expected CPI, which sent the short end of the yield curve higher in the US, thereby reducing the likelihood of a 50-basis point cut next week. Hence, equity investors see it as a relief that the Fed may not need to implement a double cut, implicitly indicating that the economic outlook remains solid. Additionally, there was a significant cyclical rotation, with energy being the worst performer and tech performing exceptionally well. If yesterday’s boost to equities had been driven by strong growth or demand numbers, we would have likely seen more broad-based gains, and energy would not have underperformed so significantly. It is also important to note the negative correlation between bonds and equities on a CPI day. This indicates significant progress in the inflation normalization process and a shift in investor views on inflation. In the US yesterday, the Dow closed up by 0.3%, the S&P 500 by 1.1%, the Nasdaq by 2.2%, and the Russell 2000 by 0.3%. Asian markets soared this morning, with some of the most cyclical and tech-heavy markets up more than 3%. US futures are also trending higher, with European futures up by more than 1%.

FI: Today’s main event is the ECB meeting. A 25bp cut seems to be a done deal, and markets will therefore focus on guidance and the updated staff projections at the meeting. On Friday, the broad wage measure – compensation per employee – showed a noticeable decline in the annual wage growth in Q2 from 4.8% y/y to 4.3% y/y, and this has likely dampened some of the concern related to the still elevated domestic inflation measures in August. We expect Lagarde to confirm that ECB is entering the dialling back phase, but we do not expect a commitment to a specific timing of further cuts; thus, we do not anticipate that it will deviate from the meeting-by-meeting and data-dependent approach to the policy rate changes, thereby keeping its guidance’s optionality and flexibility. Markets are pricing 62bp this year and 126bp in 2025. See ECB preview – Dialling back, but pace uncertain, 5 September.

FX: While the USD gained modestly in yesterday’s session the most notable G10 move was the sell-off in NOK which stopped just around the 12.00 figure in EUR/NOK before the Norwegian currency found some well-needed support from Brent crude moving back above USD 70/bbl. EUR/SEK remains in the low 11.40s while USD/JPY failed to extend a move below 142. Finally, EUR/CHF rebounded just short of the 0.93-level before finding a newly weekly high around 0.94.

USD/JPY breaks its two-day losing streak, trading around 142.90 during the European hours on Thursday. The Japanese Yen (JPY) remains subdued following the remarks from the Bank of Japan (BoJ) board member Naoki Tamura.

BoJ board member Tamura stated that there is "no preset idea on the pace of further rate hikes." Unlike in the US and Europe, Japan's rate hikes are expected to proceed more gradually. The exact timing for when short-term rates in Japan might reach 1% will depend on the economic and price conditions at that time.

The upside of the USD/JPY pair could be attributed to rising expectations of a smaller interest rate cut by the Fed in September. August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low. This development has heightened the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25-basis points interest rate cut in September.

The US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index has fallen short of the expected 2.6% reading. Meanwhile, headline CPI stood at 0.2% MoM. Core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose to 0.3% from the previous 0.2% reading.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.

Source: FXSTREET

Financial markets stay relatively quiet early Thursday as investors await the next batch of macroeconomic events. The European Central Bank (ECB) will announce monetary policy decisions on Thursday and ECB President Christine Lagarde will speak on the policy outlook in a press conference. The US economic docket will feature weekly Initial Jobless Claims and Producer Price Index (PPI) data for August.

On Wednesday, mixed August inflation data from the US helped the US Dollar (USD) stay resilient against its rivals. On a yearly basis, the Consumer Price Index (CPI) rose 2.5% in August, down from the 2.9% increase recorded in July. However, the core CPI, which excludes volatile food and energy prices, increased 0.3% on a monthly basis, surpassing the market expectation of 0.2%. The benchmark 10-year US Treasury bond yield recovered toward 3.7% with the immediate reaction to CPI readings and the USD Index erased its losses to end the day flat. Early Thursday, the USD Index holds steady above 101.50 and the 10-year yield fluctuates slightly below 3.7%. Meanwhile, US stock index futures trade marginally higher on the day.

The ECB is widely expected to lower key rates by 25 basis points (bps) after the September policy meeting. Following a short-lasting recovery attempt, EUR/USD lost its traction and touched its lowest level since mid-August at 1.1000 on Wednesday. The pair stays in a consolidation phase above this level in the European morning on Thursday.

GBP/USD lost nearly 0.3% on Wednesday and registered its lowest daily close in three weeks. The pair holds steady at around 1.3050 to begin the European session.

Bank of Japan (BoJ) board member Naoki Tamura said on Thursday that he sees a very long the path towards ending the easy policy. "We must raise short-term rates in several stages while scrutinizing how the economy, inflation respond to such steps," he added. After touching a fresh 2024-low of 140.70 on Wednesday, USD/JPY reversed its direction and was last seen trading modestly higher on the day above 142.50. 

Gold closed modestly lower on Wednesday but managed to stabilize above. XAU/USD inches higher early Thursday and was last seen trading slighlty below $2,520.

Source: FXSTREET

The Pound Sterling (GBP) holds the late Wednesday’s recovery move from the psychological support of 1.3000 to near 1.3050 against the US Dollar (USD) in Thursday’s London session. However, the outlook of the GBP/USD pair is tilted to the downside as the US Dollar clings to gains near a fresh weekly high, with investors gaining confidence that the Federal Reserve (Fed) will start the policy-easing process with a 25-basis-points interest-rate cut.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds gains near 101.70. Investors have been speculating for weeks about the size of the upcoming Fed rate cut. Expectations for a small 25-basis-points interest-rate cut have strengthened after the Consumer Price Index (CPI) data for August, released on Wednesday, showed signs of some stickiness in inflationary pressures. 

Annual headline inflation came in lower than anticipated. However, the core inflation data  – which excludes volatile food and energy prices – remained sticky. Core inflation rose by 3.2% as expected, but the monthly figure grew by 0.3%, faster than the 0.2% anticipated.

Sticky US core inflation data significantly weighed on market expectations for sizable Fed rate cuts. According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has diminished to 13% from 40% a week ago.

In Thursday’s session, investors await the United States (US) Producer Price Index (PPI) data for August and the Initial Jobless Claims for the week ending September 6. Both reports will be published at 12:30 GMT. 

The headline producer inflation data is expected to have slowed further due to falling energy prices, while core figures are projected to have accelerated.

Daily digest market movers: Pound Sterling wobbles against US Dollar

The Pound Sterling ticks up against its major peers, except Asia-Pacific currencies, in Thursday’s European trading hours. The British currency rises as market participants seem confident that the Bank of England’s (BoE) policy-easing cycle will be less aggressive than that of other central banks. 

According to a Reuters poll, the BoE is expected to leave interest rates unchanged at 5% next week but is expected to reduce them again in November despite inflation remaining above the bank’s target of 2%. The comments from BoE Governor Andrew Bailey at the Jackson Hole (JH) Symposium also indicated that the central bank will cut interest rates gradually to keep a lid over inflationary pressures.

An increase in market expectations for the BoE, keeping interest rates steady this month, appears to be the outcome of robust job growth and a decline in the Unemployment Rate. In the three months ending July, the jobless rate fell to 4.1%, while UK employers hired 265K new workers, a significantly higher number than the former release of 24K.

Going forward, the next big triggers for the Pound Sterling will be the United Kingdom (UK) Consumer Price Index (CPI) data for August and the BoE’s interest rate decision, which are scheduled for next week.

Technical Analysis: Pound Sterling rises slightly to near 1.3050

The Pound Sterling edges higher against the US Dollar to near 1.3050, recovering from 1.3000. However, the near-term outlook of the Cable has become gloomy as the pair’s price action falls below the trendline plotted from the December 28, 2023, high of 1.2828 – from where it delivered a sharp upside move after a breakout on August 21. Also, a downside move below the 20-day Exponential Moving Average (EMA) near 1.3070 has weakened the Pound Sterling’s appeal.

The 14-day Relative Strength Index (RSI) declines into the 40.00-60.00 range, suggesting that the bullish momentum has concluded for now. However, the long-term bullish trend remains intact.

Looking up, the Cable will face resistance near the round-level at 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support for the Pound Sterling bulls. 

Source: FXSTREET

The European Central Bank (ECB) is almost certain to cut interest rates again on Thursday, but with inflation risks simmering despite anaemic growth, investors will be combing its message for clues on further easing.

The ECB lowered its deposit rate to 3.75% in June and an array of policymakers have already backed another cut, suggesting their debate is likely to focus on how quickly borrowing costs need to fall in subsequent meetings.

The likely outcome is that ECB President Christine Lagarde will stick to the bank's recent narrative that decisions are taken meeting by meeting, based on incoming data with no pre-commitments.

But she may also say that all meetings are "live", keeping open the door to a cut in October, even if some conservative hawks make the case for slower easing while inflation across the 20-country eurozone remains above the ECB's 2% target.

"While an October rate cut could happen ... we think it is unlikely that the incoming information between the September and the October meeting will be sufficiently weak to bring an October rate cut in play," Danske Bank's Piet Haines Christiansen said.

More dovish policymakers, mainly from the bloc's south, are likely to argue that recession risks are rising and that with inflation within striking distance of the target at 2.2%, ECB rates are now restricting growth far more than needed.

But inflation-wary hawks, who are still in a majority, say the labour market remains too hot for the ECB to sit back, and that underlying price pressures, as evidenced in stubborn services costs, raise the risk of resurgent inflation.

New forecasts

New economic forecasts are unlikely to settle the debate.

Quarterly projections from the ECB's staff are expected to show slightly lower growth this year and inflation broadly on the same path as in June and set to return to 2% on a "sustainable" basis by the second half of next year.

That means few if any policymakers are likely to argue against further easing, with the key divide being just how quickly the ECB should move.

"Whilst we think the ECB is in no rush to cut rates, it also does not want to keep rates too high for too long," Pimco portfolio manager Konstantin Veit said. "We continue to envision that the ECB will cut rates at staff projection meetings, and anticipate its third cut in December."

Hawkish policymakers have made clear that they see quarterly rate cuts as appropriate, since key growth and wage indicators — which inform the ECB's own projections — are compiled every three months.

Investors are also divided, with another cut by December fully priced into financial markets but the chance of an interim move in October oscillating between 40% and 50%.

Lagarde's main task in her 1245 GMT news conference will be to keep all options on the table without stoking expectations for October.

"For now, we believe the quarterly rate cut path will hold, with domestic inflation and underlying labour cost pressures still too high for comfort," Societe Generale's Anatoli Annenkov said.

"For accelerated policy easing, we believe the labour markets in particular will need to show signs of a faster deterioration, something that has remained elusive."

Technical rate cut

With Thursday's move, the ECB's deposit rate will fall by 25 basis points to 3.5%. The refinancing rate is meanwhile likely to fall by a much bigger 60 basis points in a long-flagged technical adjustment.

The gap between the two interest rates has been set at 50 basis points for years and the ECB announced plans in March to narrow this corridor to 15 basis points from September in a move that could eventually rekindle lending between banks.

Such a revival is still years away, so the ECB's move is a pre-emptive adjustment of its operating framework.

For now, banks are sitting on €3 trillion (RM14.31 trillion) of excess liquidity and deposit this with the bank overnight, making the deposit rate in effect the ECB's main policy instrument.

Over time this liquidity should dwindle, pushing banks to borrow again from the ECB at the refinancing rate, traditionally the central bank's benchmark interest rate.

Once that happens, the main rate will regain its headline status, while the narrower rate corridor should help the ECB better manage market rates.

Source: The edge markets