ECB minutes in focus as markets price September hike

In focus today

• In the euro area, the ECB publishes the minutes from its July meeting, at which policy rates were left unchanged. We expect the minutes to show a bias towards a rate hike in September, which is also fully priced in by markets. Guidance beyond September is likely to remain limited.
• In Japan, nationwide July inflation data will be released overnight. Based on the Tokyo print, we expect CPI inflation (excl. fresh food) to edge slightly higher from 1.6% y/y in June. Government energy subsidies continue to hold down inflation, while underlying inflation (excl. fresh food and energy) remains modest at 1.2% y/y, helping explain the Bank of Japan's cautious hiking cycle.
• In Sweden, the Riksbank announces its rate decision. Markets widely expect the policy rate to be left unchanged, leaving communication in focus. We expect the Riksbank to signal that the probability of a rate hike before year-end has increased from the 50/50 likelihood communicated in June. This is supported by stronger growth, upside inflation surprises, and higher energy prices. A repeat of the June message, as some analysts expect, would in our view be dovish.
• In Norway, Norges Bank will publish the Q3 Expectations Survey, where CEOs' inflation expectations will be particularly important. In the previous survey, CEO's expected price growth of 4.1% on both the 1-year and 2-year horizon. A significant decline in expectations would ease inflation risk and reduce the need for further rate hikes. Wage expectations from labour market organisations will also be watched closely.
• In Denmark, we get the first version of the national accounts for Q2. We expect GDP growth of 0.5% q/q after the very strong 1.5% in Q1, taking the y/y growth rate from 6.2% to 5.0%. Industrial production grew 1.5% q/q and indicators point to modest growth in the service sector. For once, windmills rather than pharmaceuticals drove industrial growth, with production up 11.7% q/q.

Economic and market news

What happened overnight

In China, the People's Bank of China kept its Loan Prime Rates (LPRs) unchanged overnight, leaving the 1-year LPR at 3.0% and the 5-year LPR at 3.5%, in line with expectations. The decision was unsurprising, as the LPRs typically follow changes in the 7-day reverse repo rate, which has not been adjusted recently.

What happened yesterday

In the US, the FOMC minutes from the July meeting contained no major surprises. Views on inflation diverged, with 'many' participants assessing that "policy tightening would likely be necessary if inflation did not decline". Some also noted that financial conditions might not be sufficiently restrictive to return inflation to 2%, consistent with hold-voters signalling openness to future hikes following the meeting. AI was also discussed, though conclusions remained mixed, with hawks pointing to upward demand pressures and doves emphasising longer-term productivity gains. Chairman Warsh flagged the possibility of reducing meeting frequency to six per year from the current eight, though no decisions were taken and any change would not affect the 2026 schedule.

In the euro area, final inflation data confirmed the flash estimate of 2.9% y/y, with core inflation at 2.5% y/y. Underlying inflation measures were broadly unchanged, with only small increases, suggesting it remains quite sticky, but price pressures have not risen significantly following the energy shock. Separately, the Q2 Labour Cost Index eased to 3.1% y/y from 3.2% y/y in Q1, suggesting that wage pressures continue to moderate and should remain a disinflationary force. We therefore continue to expect only one further 25bp rate hike from the ECB.

In the UK, July CPI came in broadly as expected, with headline inflation rising to 2.9% y/y (cons: 2.9%, prior: 2.6%), mainly driven by the 13% increase in the Ofgem energy price cap from 1 July. Core inflation was slightly higher than expected at 2.6% y/y (cons: 2.5%, prior: 2.6%), while services eased in line with expectations to 3.4% y/y (cons: 3.4%, prior: 3.6%). Importantly for the Bank of England (BoE), food inflation declined further to 1.2% from 1.6%, suggesting limited spillover effects. Together with yesterday's weak labour market data, the release has taken the top off BoE pricing for the remainder of the year. 

Equities: Equities rebounded slightly on Wednesday, following several straight sessions of declines this week. S&P 500 closed up 0.2% but near session lows and despite markedly lower yields. Stoxx 600 slid -0.1%. Health care was the big sector leader, up 3.5% in one go, with pharma and biotech in focus. Moderna jumped 180% and Merck surged up 12% on positive Phase 3 trial results for their mRNA cancer vaccine. However, it was defensives in general that fared well yesterday, including consumer staples and real estate. Tech was the main drag but the sector was mixed. Software was higher while semiconductors sold off -2% along with regional banks. US futures are slightly higher again this morning.

FI and FX: EUR/USD spiked higher after the US Treasury announced an increase in the buyback volumes of longer-dated Treasury bonds and the bond curve flattened. At 4.64% currently, the 10Y UST is now 10bp below the peak on Tuesday. The move in US yields only partly spilled over to Europe, where the primary market has opened with plenty of SSA and covered bond deals. Today, the Riksbank is widely expected to stay on hold at 1.75%, but there is more uncertainty about the extent to which it will shift to a more hawkish tone in its verbal communication. While we expect two hikes from the Riksbank this year, we see the risk of a soft market reaction. EUR/NOK continues to drift lower, as has been the case since early August, supported by higher energy prices.