Schnabel concedes energy pass-through is more persistent than the ECB assumed

EU mid-market update: Long-end selloff now carries a US growth justification behind it; Schnabel concedes energy pass-through is more persistent than the ECB assumed; Norges hikes while SNB holds at zero; US-China truce extended only to 10th Jan with rare earths unresolved.

Notes/observations

- Yesterday finally gave 5% Treasuries a domestic macro number sturdy enough to stand next to them. The US flash composite PMI jumped to 58.4 from 56.0, the strongest since July 2021 and consistent, in S&P Global’s mapping, with roughly 5% annualised GDP growth; employment growth was the fastest in more than four years, while backlogs and supply delays pushed input-cost growth toward a four-year high. The 10Y subsequently traded 5.14%, its highest since 2007, with the move looking strikingly orderly for a level that repeatedly broke markets in 2023: three-month 10Y options have recently carried only about 79.5bp of annualised volatility versus 134bp the last time yields approached 5%. That changes the composition of the selloff. Fiscal supply, oil and term premium are still there, but a private economy printing a 58-handle while the Atlanta Fed tracks near 5% gives investors less reason to expect growth itself to rescue duration. Five percent is becoming expensive money that the economy is, inconveniently for bondholders, still demonstrating it can pay for now.

- Trump and Xi enter today’s White House meeting after Bessent quietly removed the tariff deadline that was supposed to force an agreement. The Busan truce, due to expire November 10, is now extended only to January 10, so neither president needs to manufacture a tariff breakthrough today merely to stop the clock. What remains is harder to tariff around: China’s grip on rare-earth magnets, US affiliate export controls, Taiwan, agricultural/energy purchases and the still-unbuilt AI incident channel that Bessent and He Lifeng discussed over the weekend. Beijing controls roughly 70% of rare-earth mining, 85% of refining and around 90% of magnet/alloy production, while Washington can still determine how much frontier semiconductor capability reaches Chinese firms. The financial system is considerably less separated than the technology rhetoric suggests—US banks have helped underwrite $17.2B of Chinese high-tech equity issuance this year, while mainland/Hong Kong holdings of US equities exceed $750B. Tariffs have been warehoused until January; today’s bargaining sits in things that cannot be recreated quickly by changing a customs schedule.

- Diesel is increasingly trading a different war from Brent. Crude can respond immediately to a Hormuz rumour because additional barrels can be transferred, rerouted or released; distillates are constrained by refinery capacity, low inventories and export policy. US diesel stocks entered September at their lowest seasonal level since 1982, Russia has extended restrictions on diesel/marine-fuel exports through month-end, and Washington is now discussing whether restricting US diesel exports could ease domestic pump prices. That last step would redistribute scarcity rather than manufacture a gallon: foreign buyers would bid harder for European/Asian barrels while US refiners lose part of the export arbitrage that encourages maximum runs. It also explains yesterday’s peculiar tape—Brent could touch $105.38 on renewed Gulf risk while diesel policy chatter carried its own inflation premium independent of whether Tehran ultimately lets more crude through the Strait. Crude is short a route; diesel is short finished product.

- SNB, Riksbank and Norges Bank just delivered three quite different prices for the same energy shock. The SNB stayed at 0% even after inflation rose to 0.8%, and still sees only 0.7%/0.8%/0.8% inflation in 2026–28; Switzerland has the luxury of using the franc and FX intervention as part of the tightening apparatus rather than paying for every imported oil shock with the policy rate. Sweden held at 1.75%, but the hold conceals a sizeable rewrite of the path: the Riksbank now has the rate averaging 1.85% in Q4, 2.07% in Q1 and 2.38% by Q3 2027, versus 1.82%, 1.89% and 1.97% in June, and explicitly expects hikes to begin this year as stronger demand meets a weaker krona and lingering supply pressure. Norges Bank chose to spend the first 25bps immediately, lifting to 4.50% after a genuinely divided market had priced only about a two-thirds chance of a move. Norway being an oil exporter does not make higher energy automatically disinflationary at home: wages, business costs and the NOK import channel still land in Norwegian CPI. Switzerland can let the currency absorb more of the shock; Sweden is moving the future curve; Norway moved the spot rate. The superficially identical European energy problem is producing three different monetary trades.

- Fed's Williams this early morning supplied a distinctly non-fiscal route to 5%-plus Treasuries: the productivity boom itself. He still calls inflation the Fed’s unfinished job and says another hike by year-end is reasonable, but his comment that higher expected real rates account for an important part of the bond selloff sits directly beside his comparison of AI with the 1996–2005 productivity acceleration. AI appears twice in that arithmetic. Today it is an enormous purchaser of electricity, chips, construction and capital; later, if Williams is right, it raises trend productivity and the return available on new investment. The second effect can suppress unit costs while simultaneously lifting the equilibrium real rate—so an AI boom can eventually be good news for inflation without returning the 10Y to the cheap-money yields investors remember. That is essentially the mechanism Williams laid out in May: capital-embodied productivity improvements can generate a sustained investment boom and an earlier rise in real rates, even as productivity puts downward pressure on prices. His remark that the era of explicit forward guidance is over adds another wrinkle: the Fed increasingly refuses to insure the hiking sequence the curve is pricing. And his final caveat—if the AI rents remain concentrated in a few firms, the productivity statistics can boom without the gains being distributed nearly as widely as they were in the late-1990s episode—would make this a considerably stranger expansion than the historical analogy suggests.

- SoftBank has just attached a 9-handle coupon to the OpenAI valuation debate. The group priced $11.1B of dollar/euro debt—the largest high-yield corporate bond sale on record—with the two biggest dollar tranches, $4.5B each, paying 9.25% for 5½ years and 9.75% for 7½ years; the proceeds fund the final $10B of SoftBank’s $30B OpenAI commitment and take its total OpenAI investment to $64.6B. That sits beside OpenAI’s own projection of roughly $278B of cumulative negative FCF through 2030 and recent discussion of a private valuation above $1.2T. The capital stack is becoming unusually explicit: equity investors are marking the asset on distant monopoly economics while SoftBank is borrowing real cash against its own balance sheet at almost 10% to keep buying it. Credit investors are underwriting SoftBank, Arm and Son’s broader asset pool—not OpenAI’s near-term cash generation—but the coupons are now visible carrying costs on the same AI bet. OpenAI is being accumulated at trillion-dollar equity marks with money whose contractual return is already close to double digits; the distance between those two prices is becoming one of the cleaner measures of how much future AI economics are being pulled into the present.

- Meta finally gave Reality Labs a job that does not require anybody to live in the metaverse. Muse Charm ships as a small standalone 5G device, Muse is being pushed into glasses and Macs, and Meta says future Reality Labs investment will favour AI glasses while VR hardware appears only around genuine technical leaps; Zuckerberg now explicitly puts “personal superintelligence” ahead of the metaverse opportunity. The business model is revealingly unlike the old Quest model: a large free token allowance, then economics around transactions completed through integrations with Shopify, Stripe, PayPal, Instacart and retailers, rather than simply charging heavily for the hardware or subscription. Meta spent years trying to create a destination outside Apple and Google; Charm gives it a physical endpoint from which Muse can act across the user’s existing destinations. That turns the platform ambition inside out: the valuable layer is not a virtual world people enter, but the permission to book, buy, message and execute across somebody else’s apps. The odd execution detail is that Meta is targeting the December holidays while materials and component layout are still being finalised—an unusually short distance between prototype economics and Christmas inventory.

- H&M’s 10.6% Q3 operating margin contains 160bp of yesterday’s cost problem coming back through the accounts. Sales rose just 1% in local currency, yet operating profit reached SEK6.04B and margin jumped from 8.6% to 10.6%; H&M says approximately 1.6 percentage points of the quarter’s margin came from one-off tariff/import effects that had inflated cost of goods in previous periods. Strip that timing effect out and the underlying margin is closer to 9%—still improved, but a very different earnings story from the headline. Inventories also rose to SEK39.36B from SEK37.94B, which management attributes partly to merchandise physically stuck in transit and to consolidation of its European logistics network, rather than simply unsold fashion. H&M is therefore reporting two forms of supply-chain latency in the same quarter: old import costs reversing through gross margin while current merchandise accumulates between factories and shelves. Profit has recovered faster than sales partly because accounting is finally refunding a logistics bill the consumer never saw.

- Cross-asset: yesterday’s US growth print pushed the 10Y as high as 5.14%, with the 2Y around 4.90%; Tokyo reopened from a three-day holiday and the 10Y JGB jumped to a 30-year high, extending the global duration repricing. USD/JPY is near 158 and EUR/USD around 1.14, while Asian equities split—Nikkei higher, Hong Kong and mainland China softer ahead of Trump-Xi. Brent has given back part of Wednesday’s run to $105.38 but remains above $100 as diplomacy and tanker risk trade against one another. SoftBank shares rose after completing the record bond sale; European equities opened softer, with H&M down despite the profit beat. The unusual combination remains intact: the price of long-term money is at a two-decade extreme while the companies consuming the most capital are still finding enormous pools of it.

- Asia closed lower with Shanghai underperforming -1.2%. EU indices -0.5% to +0.1%. US futures -0.5% to -1.1%. Gold -0.6%, DXY +0.1%; Commodity: Brent +2.5%, WTI +2.0%; Crypto: BTC -2.6%, ETH -2.4%.

Asia

– Reportedly DeepSeek's annualized Rev hits $1B - The Information.

– China President Xi's US visit begins with 'rare' airport welcome from Trump, trade truce extension - SCMP.

– Indonesia Central Bank (BI) Official: In general, Rupiah movement is in line with regional currencies; Is in the market to maintain rupiah stability to reflect fundamentals.

– India Central Bank (RBI) said to conduct at least $10B FX swaps to drain cash - US financial press.

– Tokyo used condo sales decline for the first time in >2 years; cites Aug data - US financial press.

– Japan PM said to be cautious about setting a GDP defense spending target - Nikkei.

– Japan's Finance Ministry to discuss reducing issuance under liquidity-enhancement auctions for medium-terms JGBs - Sources.

Europe

– German Auto Association VDA Pres said to endorse new tariffs against China for the first time - German press.

– (RU) Russia's Krasnodar region declares emergency over grain export halt - Russian press.

– ECB economic bulletin: Inflation remains above target.

– German Economic Institutes: Expect recovery to remain modest.

– German Finance Agency confirms Q4 funding plans in line with preliminary targets; Aims to sell €106B in bonds and bills.

– Russia budget deficit in 2027-2029 seen at around 2% - Russian press.

– Norway central bank (Norges) raises deposit rate by 25bps to 4.50%; as expected; Prepared to raise rates further.

– Sweden central bank (Riksbank) leaves repo rate unchanged at 1.75%; as expected; Says rate should be raised more going forward, raising rate path for 2027 and 2028.

– H&M Reports Q3 (SEK) Op 6.04B v 5.03Be, Rev 57.2B v 56.8Be; Sees Sept sales +1% local FX; Op includes the positive one-time effect related to tariffs.

– Swiss central bank (SNB) leaves policy rate unchanged at 0.00%; as expected; Drops `increased willingness' for intervention wording from FX statement.

– YouGov MRP: Reform UK would win less seats than both Labour and the Conservatives if a general election were to be held today in a dramatic reversal of fortunes for Nigel Farage's party.

– Reportedly UK Treasury is open to smaller fiscal headroom to reduce tax increases - FT.

– Schneider said to consider offer for Shelly Group SE worth approx €70/share or €1.27B [excluding debt] - Press.

– Spain PM Sanchez supports De Cos as next ECB President, will disucess with EU leaders.

Americas

– Meta Conf Summary: Muse Charm, a keychain-sized standalone AI device with voice, avatar and camera interaction, is targeted to ship for the Dec 2026 holidays; Meta VR Glasses will ship in spring 2027 for $1,299, offering a private cinema, multi-monitor computer and game console in a roughly 100-gram form factor; launch content includes 75 hands-only games, the full Quest library, cloud gaming and more than 100 immersive live events annually.

– White House released schedule for Trump-Xi summit on Thursday [September 24th, 2026].

– US considers initiative to promote dollar-backed stablecoin abroad - US financial press.

– State Department: US pledges additional $267M for DRC Ebola outbreaks.

– Senate Majority Leader Thune believes Pres Trump is open to implementing AI guardrails despite his public defiance on the issue - Axios.

– Regulators said to speed authorization of new vapes and tobacco pouches; To ease rules for flavored vapes - press.

– Canada PM Carney prepared for risk that Trump might order military action against Canada - The Globe and Mail.

Conflict/tensions

– Iran Semi-Official Fars: Conflict with U.S could expand further; Next phase could reach Indian Ocean - citing Supreme Leader Advisor Safavi.

– Commodity vessels transiting via Strait of Hormuz at 10, below the 10-day moving average of ~17; cites shipping data - financial press.

– Iran has a 'secret' weapon in its war with America; Iran customs data shows thousands of shipments of dual-use components from China - WSJ.

– Reportedly US intelligence has warned several European govts that Russia may be preparing a drone operation against Spain, France or Italy - Spanish press.

– Yemen Houthis are increasingly supplied by China; Chinese firms are the 'biggest' sources of seized goods bound for the group – WSJ [update].

– North Korea conducted test fire of updated guided rocket artillery shells on Sept 22nd.

– China said to be holding sensitive F-35 parts diverted to Hong Kong; Pentagon seeks to retrieve the parts - press.

Trade/energy

– China State Planner NDRC to raise retail fuel prices in current bi-monthly cycle, effective from Sept 25th.

– US legislators say they will announce new bill to revise national security tools used by FCC to bar Chinese tech gear.

– US, Mexico postpone USMCA discussions until October, 2026 - El Universal.

– Trump officials said to be considering rolling back beef import plan - press.

Speakers/fixed income/FX/commodities/erratum

Equities

[FTSE -0.20% at 10,683.67, DAX -0.85% at 25,210.22, CAC-40 -0.83% at 8,056.22, IBEX-35 -0.24% at 19,585.21, FTSE MIB -0.67% at 51,639.50, SMI -0.39% at 13,867.30, S&P 500 Futures -0.62%].

Market focal points/key themes: European equities declined more sharply on Thursday, with the DAX falling 0.85%, the CAC 40 dropping 0.83%, the Euro Stoxx 50 off 0.70%, the FTSE MIB down 0.67% and the FTSE 100 slipping 0.20%, as a diplomatic impasse between Washington and Tehran, technology-sector warnings on AI risks and rising sovereign yields eroded conviction. Expectations of an immediate breakthrough at the UN General Assembly faded after U.S. and Iranian officials remained far apart on terms for a formal peace agreement and the reopening of the Strait of Hormuz, while global tech leaders highlighted near-term deployment risks, monetisation timelines and regulatory hurdles. The most notable individual movers were Raspberry Pi, surging 12.5% after record H1 revenue rose 90% and adjusted EBITDA more than doubled, and Shelly Group, climbing 6.0% on a €70-a-share all-cash takeover by Schneider Electric, against Vistry Group’s 3.5% decline after it lowered full-year profit expectations and H&M’s 3.0% drop despite a better-than-expected Q3 operating-profit increase. U.S. Treasury yields climbed to multi-year highs, lifting the probability of another Federal Reserve rate hike next month to 70%, while French CDS touched multi-year peaks amid parliamentary gridlock and investors awaited the Trump-Xi bilateral talks later in the day.

Equities

- Consumer discretionary: ASOS [ASC.UK] +5.5% (Q4 GMV returned to growth, gross margin exceeded the 48%-50% guided range and FY adjusted EBITDA is expected above the midpoint of £150m-£180m guidance), H&M [HMB.SE] -3.0% (shares fell despite a better-than-expected Q3 operating-profit increase, with the improvement driven largely by cost control and sourcing efficiencies rather than stronger top-line momentum), Vistry Group [VTY.UK] -3.5% (lowered FY profit expectations after contract renegotiations deferred completions, while the homebuilder swung to a substantial H1 loss and outlined a smaller operating model).

- Consumer staples: British American Tobacco [BATS.UK] +2.0% (defensive large-cap demand strengthened as Middle East uncertainty and elevated US yields drove a risk-off European tape).

- Healthcare: Sandoz [SDZ.CH] +1.5% (defensive healthcare demand supported the stock as investors reduced exposure to cyclical and growth sectors), Novartis [NOVN.CH] +1.0% (a US federal judge ruled in its favour against claims that the company misused a patent to protect Entresto exclusivity).

- Technology: Raspberry Pi [RPI.UK] +12.5% (record H1 revenue rose 90% and adjusted EBITDA more than doubled to $40.3m, with FY26 earnings now expected above prior market forecasts), Shelly Group [SLYG.DE] +6.0% (Schneider Electric agreed a €70-a-share all-cash takeover valuing the smart-device maker at €1.2bn), Logitech [LOGN.CH] -2.5% (European technology names tracked the overnight US tech selloff as Treasury yields remained near multi-year highs).

- Energy: Harbour Energy [HBR.UK] +2.5%, BP [BP.UK] +2.0% (Brent held above $103 as stalled US-Iran diplomacy sustained the Middle East supply-risk premium).

- Industrials / Defence: Hensoldt [HAG.DE] -2.5% (defence shares reversed lower after the prior session's gains, with profit-taking compounding the broader risk-off European trade).

- Financials: Partners Group [PGHN.CH] -2.0%, UBS Group [UBSG.CH] -1.5%, Zurich Insurance [ZURN.CH] -1.5% (Swiss financials lagged amid broad de-risking driven by elevated sovereign yields and continued Middle East uncertainty).

Speakers

– (SE) Sweden Central Bank (Riksbank) Gov Thedeen: If the inflation and economic outlook hold, the Riksbank will raise rates before year-end; Declines to specify November versus December.

– (US) Fed's Williams (moderate, voter): Reasonable to see another rate hike by end-2026; Big challenge is on inflation, we have a lot of work to do; We have seen remarkable resilience in US economy.

– (CH) SNB Pres Schlegel: Low interest rate makes CHF attractive for carry trade; Reiterates will take meeting by meeting approach - post-rate-decision press conference.

– (RU) Russia Fin Min Siluanov: Proposing 30% windfall tax on fertilizer makers and 20% on gold producers.

– (UK) BOE Dep Gov Lombardelli: No signs so far 2nd-round effects are large; Case for hike grows longer conflict persists; Uncertainty about next move and path beyond.

– (EU) ECB's Schnabel (Germany): Energy shock much more persistent than thought.

– (EU) ECB's Kocher (Austria): Must prevent too high inflation, becoming entrenched.

– (MY) Malaysia PM Anwar: Malaysia will remain open to Chinese tech investment.

– (KR) North Korea Foreign Minister Choe: The more the US and its allies advocate denuclearization, the more it strengthens our stance towards the US - Statement.

– (JP) Japan Chief Cabinet Sec Kihara: Watching US-China summit with strong interest - Tokyo, Japan.

– (TH) Thailand Foreign Minister Sihasak: Thailand in serious discussions with US on tariffs.

– (JP) Japan Fin Min Katayama: Reiterates principles on Forex established since coordinated Japan-US intervention remain in effect - Tokyo, Japan.

– (AU) Australia Defense Minister: Impact from OpenAI breach minor; This incident is a warning on AI development; OpenAI hack was a "serious incident"; OpenAI being cooperative, but situation is unacceptable.

– US President Trump: Today, Türkiye and Bangladesh announced purchases totaling 111 Boeing Airplanes—with options for 50 more—following support from Howard Lutnick and the Department of Commerce.

– (UK) BoE's Braddick: "Try not to be distracted by the short-term drama".

– (VE) Venezuela Acting Leader Delcy Rodriguez: Recent energy deal with US will help global energy balance; US oil deal will help support global energy balance - UNGA.

– (EU) European Council President Costa: Spoke to Iran president, urged Iran to resume its cooperation with the IAEA.

– (CN) China President Xi: Look forward to in-depth exchanges with President Trump; To expand cooperation between two countries in various areas- Statement released by China's Foreign Ministry.

– (US) Treasury Sec Bessent: Agreed to extend China trade truce until January 10th [2027] - Fox News.

– (US) NEC Dir Hassett: Still work to do to restor Fed independence; The non-Trump appointees are calling for a lot of rate hikes.

Economic data

– (HK) Hong Kong Aug Trade Balance (HKD): -71.2B v -9.2Be.

– (PH) Philippines Aug Budget Balance (PHP): -161.3B v -106.3B prior.

– (DE) Germany Sept IFO business climate: 89.9 v 89.2e.

– (HU) Hungary Sept Business Confidence: -8.3 v -9.1 prior.

– (CZ) Czech Sept Consumer Confidence Index: 105.1 v 102.0e.

– (ES) Spain Aug PPI M/M: 2.9% v 3.1% prior; Y/Y: 13.2% v 9.4% prior.

– (FR) France Sept Consumer Confidence: 86 v 85e.

– (NO) Norway Aug Credit Indicator Growth Y/Y: 4.5% v 4.3% prior.

– (FI) Finland Aug PPI M/M: 1.2% v 0.1% prior; Y/Y: 7.3% v 6.9% prior.

– (ID) Indonesia Aug M2 Money Supply Y/Y: 8.2% v 8.3% prior.

– (EU) EU27 Aug New Car Registrations: 5.3%.

– (AU) Australia Aug employment change: 39.5k v 23.5ke; unemployment rate: 4.6% V 4.5%E.

– (JP) Japan Sept preliminary manufacturing PMI: 54.1 V 54.9 prior (9th month of expansion).

Fixed income issuance

- (IT) Italy debt agency (TESORO) sells €2.50B VS. €2.25-2.50B indicated range in new 3.00% Oct 2028 BTP bonds; avg yield: 3.64% v 3.02% prior, bid-to-cover: 1.64x v 1.58x prior.

- (IT) Italy Debt Agency (Tesoro) sells total €2.0B vs. €1.5-2.0B indicated range in I/L 2031 and 2037 bonds (BTPei).

Looking ahead

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 12-month Bills.

- 05:40 (UK) BOE 7-day short-term repo operation (STR).

- 06:00 (FI) Finland to sell Ori Bonds.

- 06:00 (IL) Israel July Manufacturing Production M/M: No est v -0.5% prior.

- 06:00 (UK) Sept CBI Retailing Reported Sales: No est v -48 prior; Distribution Reported Sales: No est v -27 prior.

- 07:00 (BR) Brazil Central Bank (BCB) Monetary Policy Report.

- 07:00 (BR) Brazil Sept FGV Consumer Confidence: No est v 84.7 prior.

- 08:00 (CL) Chile Aug PPI M/M: No est v 1.9% prior.

- 08:00 (MX) Mexico July IGAE Economic Activity Index (Monthly GDP) M/M: -0.1%e v -0.1% prior; Y/Y: 1.7%e v 2.8% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (US) Q2 Current Account Balance: No est v -$226.8B prior.

- 08:30 (US) Initial Jobless Claims: No est v 196K prior; Continuing Claims: No est v 1.730M prior.

- 08:30 (CA) Canada July Retail Sales M/M: -0.8%e v +0.6% prior; Retail Sales (ex-auto) M/M: -0.5%e v +0.5% prior.

- 08:30 (US) Weekly USDA Net Export Sales.

- 09:00 (BE) Belgium Sept Business Confidence: No est v -13.2 prior.

- 09:00 (RU) Russia Gold and Forex Reserve w/e Sept 18th: No est v $758.2B prior.

- 10:00 (US) Aug New Home Sales: 615Me v 607K prior.

- 10:30 (US) Weekly EIA Natural Gas Inventories.

- 11:00 (US) Sept Kansas City Fed Manufacturing Activity: No est v -13.2 prior.

- 11:30 (US) Treasury to sell 4-Week and 8-Week Bills.

- 12:00 (CA) Canada to sell 2 Year Bonds.

- 13:00 (US) Treasury to sell 7-Year Notes.

- 15:00 (MX) Mexico Central Bank (Banxico) Interest Rate Decision: Expected to leave Overnight Rate unchanged at 6.50%.

- 15:00 (AR) Argentina July Economic Activity Index (Monthly GDP) M/M: No est v 0.8% prior; Y/Y: No est v 2.7% prior.

- 19:01 (UK) Sept GFK Consumer Confidence: -16e v -14 prior.

- 23:00 (TH) Thailand Aug Customs Trade Balance: -$4.1Be v -$3.6B prior; Exports Y/Y: 24.7%e v 21.6% prior; Imports Y/Y: 33.0%e v 36.7% prior.

- 23:30 (JP) Japan to sell 3-Month Bills.