Market movers today
- In the US, the labour market report is due today. The US labour market has shown weakness for a while, so we think it is important to keep an eye on employment growth, which is an important recession indicator. We expect employment growth to come in around 164,000. Further, we estimate average hourly earnings rose 0.30% m/m in August, unchanged at 3.1% y/y.
- In the euro area, focus will be on the final Q2 GDP estimate, as we will get detailed information about the GDP components for the first time. The flash estimates showed that the euro area economy is limping along with a growth rate of 0.2% q/q. We will look out for how domestic demand contributed to the Q2 growth, as signs increasingly show that domestic demand is starting to feel the pinch as well.
- July German industrial production figures are due today as well. Industrial production has been a key driver of the German slowdown and the print fell 5.2% y/y in June following seven consecutive months with falling production.
- The Bank of Russia is expected to deliver a 25bp cut to the key rate to 7.00%.
Selected market news
Risk appetite continued to improve yesterday, as it was revealed that high-level trade talks have been planned for the beginning of October and as the ADP (NASDAQ:ADP) report and the ISM service index both surprised to the upside. Hence, so far little evidence that the apparent weakening in the manufacturing outlook seen in the US ISM manufacturing index earlier in the week has spread to the labour market or the service sector.
US treasuries sold off heavily and the curve was pushed more than 10bp higher. European bond markets were also under strong pressure as the market scaled back QE expectations ahead of the ECB meeting next week and as the lower geopolitical risks (Brexit, Hong Kong and trade war) continued to support European equity markets. 30Y German yields turned positive for the first time since the beginning of August. We published an ECB preview this morning (see box to the right). We still expect the ECB to deliver a dovish package despite the apparent improvement in global risk appetite and the QE comments from hawkish ECB members over the past week, see our ECB Preview , 6 September 2019.
The Riksbank stole the limelight in Scandinavia yesterday. On the back of weakening growth, higher unemployment and geopolitical turbulence internationally it was widely expected that the Riksbank would delay the next hike. It did not and still said that a hike is to be expected around the turn of the year. Instead it lowered the rate path by up to 50bp. In many ways this resembles its reaction function in 2011 when Europe was heading into another crisis. In September 2011 the Riksbank acknowledged that the growth outlook had deteriorated and lowered (flattened) the rate path. Still it was signalling hikes through 2011-2012. Only three months later, in December, it delivered the first of a series of rate cuts. We do not think the Riksbank will hike this time around either and keep our forecast that the Riksbank will cut rates in Q1 next year.
Scandi markets
Only data point out of Sweden today is budget balance from SNDO, which is not a market mover.
In Norway, the recovery in the August PMI supports our view that the decline in the PMI in June and July was exaggerating the slowdown in the manufacturing sector. Actual manufacturing has been considerably stronger and this has probably continued, with an increase of 0.2% m/m in July.
Fixed income markets
The fixed income market continued to sell off and the curve bear steepened as risk appetite continued to improve yesterday and as the market continued to focus on the outlook for a lower than expected ECB QE programme next week. 30Y Germany jumped 14bp and yields turned positive for the first time since the beginning of August.
This morning Bloomberg published its survey ahead of the ECB meeting next week. It showed that an 80% majority of economists expect the introduction of a QE programme next week. The median is for a EUR30bn programme for 12 months. The median is also for a 10bp cut followed by another 10bp cut in December. Analysts expect ‘mitigating measures’ as well.
See also our ECB Preview, 6 September 2019
FX markets
A strong ISM non-manufacturing print halted the rebound in EUR/USD before it reached the 1.1100 level, as the USD found support from a rise in USD rates. We look for non-farm to come in in line with consensus expectations today and furthermore current pricing of a 25bp cut from the Fed in September should make life easy for Fed chair Powell when he speaks tonight. Hence, EUR/USD could end the week on a quiet note.
EUR/SEK was down eight figures immediately after the Riksbank meeting, arguably in response to the decision not to postpone the next hike further into 2020. However, the move was partially reversed during the day and the net-negative effect on the cross was muted relative to the sharp re-pricing of the rate path (removing 7 of 17bp of rate cuts). One reason may be the substantial flattening of the rate path, which supports our view that the Riksbank will remain one of the softest central banks around the globe for a long time. The decision today may be viewed as relatively hawkish compared to an ECB bazooka next week and thus temporarily weigh on EUR/SEK. We still think the next Riksbank move is a cut and as such we continue to see EUR/SEK as a buy on dips, keeping 1M and 3M (NYSE:MMM) targets at 10.70 and 10.80.
EUR/GBP moved to a new low at 0.895. We expect the cross to trade in 0.88-0.90 on the back of politics moving towards an election and extension and a new discussion will be needed once it becomes formal that the election process is underway. In our view, the positive drivers for the GBP are (1) a sudden stop, which would lead to a severe UK recession, appears to become postponed and (2) an imminent shock to the exchange rate via tariffs looks less likely.
Key figures and events