US CPI slightly higher than expected

In focus today and over the weekend

This afternoon, US September PPI and preliminary October consumer sentiment survey from University of Michigan is due for release. Markets follow the latter especially close for clues on consumers' inflation expectations.

In Germany, we receive the final HICP inflation data, which will allow us to see how the LIMI measure of domestic inflation fared in September, which is an important input for the ECB.  

China's Finance Ministry will hold a briefing on Saturday on strengthening fiscal policy. The briefing on Saturday is thus the place to look for China's fiscal stimulus plans. We do expect a clear fiscal stimulus plan, but markets will likely be nervous until we see the plans as there is some risk that they underwhelm expectations that have become very high. On Sunday, China releases CPI for September, which is expected to be unchanged at 0.6% y/y. Focus is more on the core inflation, which declined to 0.3% in August, but the data is more backward looking, and given the recent stimulus signals markets will likely put less emphasis on the numbers. On Monday, China releases trade data for September. The trend lately has been slowing export growth as global manufacturing activity has slowed.

Economic and market news

What happened yesterday

In the US, September CPI came out slightly above expectations in both headline (0.2% m/m SA; forecast 0.1%) and core terms (0.3% m/m SA; forecast 0.2%). In annual terms, headline inflation cooled down to 2.4% (from 2.5%) while core inflation remained steady at 3.3%. A sudden uptick in food prices explained much of the upside surprise in the headline index while especially goods prices drove core inflation higher. On the services side, especially housing inflation cooled down after an unexpected uptick in August. In the FOMC minutes published on Wednesday Fed highlighted sticky housing inflation as a concern. Markets could have seen the cooling number as a dovish signal.

USD strengthened in the hours after the release, with EUR/USD shortly falling below 1.09 for the first time since August. This was helped by an uptick in initial jobless claims as well as Fed's Bostic saying that he is open to skipping the planned November rate cut if data backs it. Overnight USD weakened again, and EUR/USD are trading around 1.094, slightly higher than before the CPI release yesterday. This could have been affected by Fed's Goolsbee saying that most Fed members expect rates to come down to a point well below where they are today.

In the euro area, we got the minutes from the ECB meeting, which showed that ECB members preferred to maintain flexibility on how quickly interest rates should come down. It was underlined that the pace of interest rates cut will depend on incoming data.

In Norway, September core inflation came in at 3.1% y/y from 3.16% in August. Consensus had 3.2% and Norges Bank projected 3.3%. Base effects from a low September last year were widely expected to pull the y/y-release higher even though the overall disinflationary tendencies were likely to continue. So, a slight downside surprise. Either way we think indicators on capacity utilisation are more important for the near-term monetary policy setting than realised inflation as illustrated by Norges Bank's recent guidance. The November interim meeting was never a live meeting which has not changed with yesterday's print.

In Sweden, GDP came in at 1.1% m/m and showed improvement as we expected. Riksbank governor Thedéen commented on the release and said that it was pretty much in line with their expectations. We think this confirms our case for a 25bp cut at the next meeting, since inflation is still to the high side of the forecast to justify a 50bp cut.

In Denmark, headline inflation fell to 1.3% y/y in September, from 1.4% in August. We expected inflation to drop slightly more to 1.2%. The decrease was expected since because of lower energy prices, which was confirmed with both electricity and fuel declining. Core inflation increased from 1.2% to 1.6% on the back of a 2.6% increase in food prices. We are not concerned about this development since it is somewhat expected that inflation will rise because the very low food prices from autumn last year drops out of the measurement.

In the Middle East, we are still waiting for Israel's response to the Iranian missile attack last week, which will determine whether we will see a further escalation of the conflict in the region. US President Biden has pressed Israel to make the response moderate, but it remains to be seen if that plays out. Israel's defence minister Gallant said on Wednesday "Our attack on Iran will be deadly, precise and above all surprising. They will not understand what happened and how it happened. They will see the results."

Equities: Global equities were marginally lower yesterday, primarily dragged down by markets in Europe and the US. Two significant data points were released yesterday, both of which are detrimental to equities, in our opinion. The US CPI came out higher than expected, while jobless claims also exceeded forecasts. Although there are numerous ways to rationalise these less-than-positive prints, we were still somewhat surprised by the resilient reaction from equity investors. Moreover, both cyclicals and defensives performed similarly, suggesting that investors decided to look beyond the immediate noise, particularly in the jobless claims data. In the US yesterday, the performance was as follows: Dow -0.1%, S&P 500 -0.2%, Nasdaq -0.1%, and Russell 2000 -0.6%. The volatility in Chinese equity markets continues this morning, but it appears to be starting to level off. The rest of Asia is positive this morning, along with futures in Europe and the US.

FI: Long-end rates moved higher through most of yesterday's session, though the move faded as US initial claims data rose significantly from 225k to 258k - the highest level since mid-2023. 10Y Bunds ended the day unchanged at 2.25%, while short-end tenors fell a couple of basis points. The US CPI figures provided a somewhat mixed picture with both headline (+0.2% m/m) and core (0.3% m/m) surprising to the topside, while details such as shelter inflation - a focal point in this week's FOMC minutes - softened considerably. The decline in US yields continued through the evening session as the USD 22bn auction in 30Y USTs saw very robust demand.

FX: EUR/USD briefly dipped to the 1.09 mark following hawkish comments from Bostic, who stated that the "door is open to skipping a cut in November," but the cross ended yesterday's session largely unchanged, slightly above 1.09. EUR/GBP edged higher during yesterday's session with focus today turning to the release of monthly GDP for August this morning. EUR/NOK remained relatively stable during yesterday's session as inflation surprised to the downside.