Energy base effects to drive EA August inflation down, focus on services price momentum

In focus today

We expect the euro area inflation data today to show that headline inflation eased to 2.2% y/y in August from 2.6% in July, driven by base effects on energy prices. We see underlying inflation remaining persistent due to sticky service inflation and a normalization of core goods inflation from the very low levels seen in the first half of the year. The most important part of the print will be the monthly increase in services inflation, which we expect to come in at around 0.3% m/m s.a. for the third consecutive month. This will still be high but at least lower than what we saw at the beginning of the year.

The Fed's preferred measure of inflation, the PCE, is due for release this afternoon. CPI data released earlier suggested that on a monthly level, underlying inflation pace has remained fairly steady from June.

Economic and market news

What happened overnight

In Japan, we got mixed signals as core inflation rose to 2.4% in Tokyo in August, which was higher than expected (cons.: 2.2%). As a leading indicator of the national CPI, the print is a signal in the hawkish direction. Retail sales rose less than expected at 2.6% (cons.: 2.9%), while unemployment also picked up. As of this morning the Nikkei is up, and the JPY has gained. Asian markets in general were also up, driven in part by yesterday's strong US macro data (see below).

What happened yesterday

Both German and Spanish inflation declined by more than expected in July to 2.0% and 2.4% y/y, respectively. The decline was mainly due to base effects on energy prices but shows that the disinflationary process is going in the right direction, which supports the case of gradual easing from the ECB.

In Sweden, Swedish Q2 GDP declined less than initially reported at -0.3% q/q as we had expected. EURSEK trended down slightly during the day but otherwise market impact was muted.

From the US, Q2 GDP growth was revised up to 3.0% y/y at an annualized rate from 2.8% previously reported, while initial jobless claims gave mixed signals as new claims fell while continuing claims increased. Both US yields and the dollar rose slightly on the news, as did equities though the gains were pared by the end of the session.

Equities: Global equities ended higher yesterday with Europe leading the advances. Equity investors essentially received what they desired in the form of Goldilocks/soft-landing data, which normally would have led to cyclical outperformance. This trend was observed in Europe; however, one major company in the US, Nvidia, disrupted the typical pattern there. Consequently, we experienced an atypical day with consumer staples and tech underperforming together. It is important to note that we should not read too much into this but rather focus on the fact that the soft-landing narrative was reinforced. The ECB gained more confidence in implementing a rate cut at their next meeting in less than two weeks. The combination of improved odds for a soft-landing and continued looser monetary policy should benefit small caps the most, which was indeed the case yesterday despite a marginal increase in US yields. In the US yesterday, Dow +0.6%, S&P 500 0.00%, Nasdaq -0.2%, and Russell 2000 +0.7%. Asian markets are broadly higher this morning, with Chinese markets leading the advances. European futures are mixed, while US futures are higher.

FI: The upward revision of the Q2 US GDP figures was the dominating theme in yesterday's session, while markets reacted very modestly to the soft German and Spanish inflation data out for August. 10Y UST yields ended the day 4bp higher, while long-end EGB yields were close to unchanged across the board. Markets continue to discount 160bp worth of rate cuts from the ECB until end-2025. The Bund ASW-spread reached a new 2.5 month low of 28.52bp, and thus the widening seen following the French elections has now been almost fully reversed.

FX: Yesterday marked the fourth consecutive day with limited FX volatility with the most notable price action being EUR/USD continuing the last sessions' move lower and the CNH extending its rebound. The EUR generally did poorly which saw EUR/SEK and EUR/NOK edge marginally lower. EUR/GBP was little changed with the cross finding support around the 0.84 level