Markets
The BLS’s employment revision yesterday offered the final input from the labour market perspective for next week’s Fed policy meeting. The 911k downward adjustment for April 2024 through March 2025 was a historically high one but didn’t lure markets into adding to their Fed easing bets for 2025 – the opposite actually happened. It’s perhaps not that farfetched given that inflation has been reaccelerating since April to still be above the central bank’s 2% target. PPI numbers for August today addressed those concerns a bit. They unexpectedly printed a negative 0.1% m/m in the headline and core (ex. energy and food) gauge, missing the 0.3% estimate. The annualized figures slowed to 2.6% and 2.8% respectively, well below the 3.3% and 3.5% expected. A downward revision to July’s (though sizeable) PPI increase adds to the magnitude of the sub-consensus outcome. The supercore series (ex. food, trade and energy) matched the 0.3% m/m forecast (2.8% y/y). Crude food acted as a major drag, tumbling a whopping 13.2% on a monthly basis. Energy (-0.4% m/m) and services (trade in particular: -1.7%) weighed as well. The numbers raise the stakes for tomorrow’s consumer equivalent, for which a rise to 2.9% from 2.7% is expected, and offered markets a welcome distraction from an otherwise dull trading session today. US yields fell in a bull flattening move with net daily changes varying between -3.3 bps (2-yr) to -0.8 bps (30-yr). Money markets attach a slightly higher albeit still very low probability to an outsized cut (50 bps, 7%) by the Fed next week. US President Trump once again called for a “big” move minutes after the release. European rates left the intraday highs in sympathy and are now flat for the day. European stocks trade in the green but are underperforming US peers in the wake of the lower-than-expected PPIs. The US dollar loses some marginal ground. EUR/USD trades around 1.172, up from a 1.171 open. DXY is going nowhere close to but below 98. Oil prices are in a three-day winning streak (Brent 67$/b). Today’s move is possibly geopolitically inspired. Russian drones crossed Polish territory early this morning and were later downed by Nato-member warplanes. The military alliance discussed the incident after Poland invoked Article 4 of the treaty. Together with lower (US) bond yields, its keeping gold near record highs.
News & Views
Norwegian inflation fell by 0.6% M/M in August with the headline number accelerating as expected from 3.3% to 3.5% on an annual basis. Underlying core inflation fell less than hoped (-0.7% M/M vs -0.9% M/M) to stabilize at 3.1% Y/Y (vs 2.9% consensus). Details showed food and non-alcoholic beverages prices dropping by 1.8% M/M with furniture, household equipment and routine maintenance (-2.3% M/M) and transport (-1.5%) prices also dragging monthly prices down. Higher prices for housing, water, electricity, gas and other fuels (1.2% M/M), restaurant and hotels (+0.3% M/M) and clothing and footwear (0.3%) couldn’t make up for that. Today’s numbers create some doubt on the outcome of next week’s Norges Bank policy meeting. They lowered the key rate a first time in June (4.5% to 4.25%) with a cautious easing bias for the remainder of the year (4% policy rate by year-end). The market implied probability of a 25 bps rate cut next week fell from 82% to 68%. The NOK swap rate curve bear steepens with yields up to 6.8 bps higher at the front end (2-yr). The NOK profits with EUR/NOK (11.61) touching its lowest level since mid-June.
The Czech National Bank commented on August inflation numbers which were confirmed today at 0.1% M/M and 2.5% Y/Y which was slightly below the central bank’s own forecast (2.7%). Core inflation edged up to 2.8% Y/Y, driven by goods prices. Inflation in market services remained unchanged but elevated (4.4% Y/Y). Core inflation was affected by rising housing costs this year. In August, year-on-year growth in imputed rent remained at 4.9% for the third time in a row. The CNB expects inflation to remain close to recent values for the rest of the year. Given the still elevated inflation and its unfavourable structure, there are still reasons for a cautious monetary policy approach. CNB board member Seidler today argued in favour of keeping Czech rates unchanged for now. Vice-governor Zamrazilova did the same earlier this week. The Czech koruna today nevertheless falls prey to some profit taking with EUR/CZK bouncing off its weakest level since the end of 2023 (24.30) to 24.39.
