Germany may ease fiscal policy but (unfortunately) not now

Market movers today

• Today, we have a light calendar where we mainly look out for the final euro area inflation figures at 11:00 CEST. The flash estimates showed overall HICP inflation at 1.1% y/y and core inflation at 0.9% y/y in July and we expect no revision of the data.

• Markets will continue to carefully watch tweets and communication from the US and China and, most recently, following Donald Trump's upbeat tweet this weekend. 

• Later this week, we have the important US manufacturing PMI, which we expect to tick below 50 (however, we note upside risks from strong regional PMIs last week). We also have minutes from both the Fed and ECB meetings in July and the Jackson Hole Conference (Powell speaks on Friday). We also get euro area PMIs.

• In the Nordic area, Swedish unemployment figures and the Norwegian investment survey are the most important itemsthis week.

• The ECB is widely expected to announce a tiering system while cutting rates at the next meeting in September. We have taken a closer look, see ECB: Mitigating side effects - gauging the tiering premium , 16 August.

Selected market news

Risk appetite has improved this morning. Many Asian stock indices, the US S&P500 futures, oil and US 10-year Treasury yield are all up. Yesterday, US President Trump tweeted that "We are doing very well with China, and talking ". It seems like investors have to accept that Trump is going intervene in the trade war by tweeting from time to time. Apparently, more US-China teleconferences are planned over the next two weeks. Still, we are having a hard time seeing a trade deal on this side of the presidential elections.

In Germany, Finance Minister Ola Scholz hinted at a EUR50bn (~1.5% of German nominal GDP) fiscal spending package in case of recession, although it is not imminent, see Bloomberg . The German government is under heavy pressure by many to ease fiscal policy, as the German economy is struggling (contracted in Q2) and there is a lack of safe assets (bonds) in the market. See also Harr's view: Why Germany should ease fiscal policy , 18 August. Unfortunately, the fact that Scholz says a package is not imminent also highlights the time lag problem with fiscal policy: It takes time for politicians to recognise the need for fiscal easing and vote in favour of a specific package, and hence when it has an impact on real activity.

The Iranian supertanker that was detained last month, has left Gibraltar waters despite the US's objections.

Ahead of Boris Johnson's visit to Angela Merkel and Emmanuel Macron, a government report on the worst-case impact on the British economy in case of a no deal Brexit was leaked to the press yesterday. It is grim reading suggesting the UK is definitely not ready for a no deal Brexit, see BBC . While the government says that is why it is stepping up no deal preparations, it also highlights the risk of the new government's strategy.

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