Danske Research Team
Danske Bank A/S
Markets were in waiting mode ahead of final pivotal data releases before September's round of central bank meetings. Equity markets were mixed, with European main indices outperforming their US counterparts amid Nvidia's somewhat disappointing earnings report, while bond yields were little changed. The post-Jackson Hole rally in EUR/USD cooled off, with the cross declining back below 1.11. Oil prices rose modestly due to supply concerns in Libya with Brent hovering close to USD80/bbl, as the situation remains unresolved (see Reuters).
Preliminary euro area August HICP showed headline inflation cooling to 2.2% y/y - the slowest pace in three years. That said, the decline was largely driven by negative base effect in energy prices, as core inflation was virtually unchanged at 2.84% y/y (July 2.85%).
In the US, Conference Board's August consumer sentiment survey was strong on the headline level but with soft details. Consumers turned more optimistic both with regards to current economic conditions (134.4; from 133.1) as well as the future outlook (82.5; from 81.1), but still saw their employment prospects weakening. The 'Jobs Plentiful' index fell to the lowest level since March 2021. Leading labour market data released so far in August has provided mixed signals, as both consumer sentiment and PMI employment indices weakened but jobless claims have still trended lower after July distortions.
Next week's most important data release will be the US August Jobs Report on Friday. We forecast a modest rebound in nonfarm payrolls growth to +170k (July +114k), we see unemployment rate remaining at 4.3% (unchanged) and average hourly earnings growth at +0.2% m/m SA (unchanged). Markets are currently pricing around 35% probability of the Fed initiating its easing cycle with a 50bp cut, but a print in line with our forecasts would likely push market pricing to converge towards a 25bp move (our call).
Leading up to Friday, US data calendar includes several other key releases as well, namely August ISM manufacturing and services indices as well as the July JOLTs data. Job openings from the latter are a key measure of labour demand for the FOMC.
Labour markets remain in focus in the euro area as well. ECB's key measure of wage growth, the Q2 Compensation per Employee data, is due for release on Friday. The ECB staff projections from June estimated that wage growth would increase to 5.1% y/y in Q2 from 5.0% y/y in Q1, but the indicator of negotiated wages (Q2 +3.6% y/y; Q1 +4.7%) pointed towards clear downside risks. Markets have fully priced in ECB's 25bp cut at the September meeting, in line with our call. Focus is turning towards the final meetings of 2024, where we expect one more cut in December. Markets price in cumulative 37bp for the last two meetings of the year, implying a 50% probability of the next move coming already in October.
Leading data is due for release from China as well. Official NBS PMIs will be released already tomorrow on Saturday and the private Caixin manufacturing PMI will follow on Monday. The manufacturing indices have sled below the neutral level of 50 over summer, where we expect them to remain, reflecting continued growth challenges in China.
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