Market Commentary

Relatively dovish comments on inflation by Fed Governor Waller prompted a paring back of US rate hike expectations, contributing to a decline in bond yields, firmer equity markets, and a slightly weaker dollar. The euro and sterling are trading at around $1.1630 and $1.3545 respectively this morning – ahead of the August payrolls report in the US later today – leaving EURGBP hovering just below the £0.86 level. According to the consensus forecast for the payrolls report, the economy is expected to have added 55k jobs last month, following a decline in employment of almost 25k in July, while the unemployment rate is expected to come in at 4.1%, matching July’s year-to-date low.

Yesterdays Events

The market has pared back the chances of a hike in interest rates at this month’s Fed meeting, though they are still seen at around 50/50 (down from circa 70/30 earlier in the week) and, indeed, a 25bps increase by the end of this year is still more than fully priced in. US bond yields edged down – led by 2-year yields which fell by around 4bps – though they ended off their lows for the day following the release of stronger than expected (US) economic data. German yields fell by 3-5bps, while UK bonds outperformed, with yields declining by 8-10bps, helped by comments by the Chief Economist of the Bank of England who said any hike in interest rates should be modest and “need not be the start of a prolonged and aggressive series of increases”.  Meanwhile, in equity markets, US indices rallied strongly, with the S&P 500 adding over 1%, while European stocks gained about half a percent.

In his remarks yesterday, Fed Governor Waller said that “while inflation remains meaningfully above the 2% goal, recent data suggest we are finally seeing some signs of disinflation,” adding that if the August CPI inflation data due next week show “continued progress toward 2%, then I am willing to support holding the policy rate at its current level” at this month’s monetary policy meeting (September 15th-16th). He did also warn though that “it may not take much acceleration in inflation to nudge me into supporting tighter policy” (i.e. higher interest rates).

The latest ISM survey of activity in the US services sector was a good deal stronger than expected. Both output and new orders both rose sharply in August, while the “prices paid” index pointed to an acceleration in input cost inflation, rising to its highest level in about four years.

The Day Ahead

For the day ahead, the focus for markets will be on the US jobs report, while other data due include retail sales (July) in the Euro area and the construction PMI (August) in the UK. The Bank of England Governor, Andrew Bailey, is scheduled to speak later this morning.

Market Commentary

The yen has strengthened notably against the dollar overnight, gaining around 1% or so, supported by the prospect of an increase in interest rates by the Bank of Japan – a 25bps hike at its meeting in a fortnight’s time is more than fully priced in – and fuelling speculation there may have been official intervention to boost the currency. This has spilt over into other dollar crosses, with an easing in oil prices also weighing on the US currency. The euro and sterling are trading just north of $1.16 and just under $1.35 respectively this morning, up from lows of about $1.1565 and $1.3475 during yesterday’s session. EURGBP has nudged up to £0.86, the first time it has been at this level since early July.

Yesterdays Events

There was some respite for US government bonds with yields nudging down by 2-3bps, helped by some softer than expected (US) economic data including the ADP employment report for August. German and UK yields edged up by a few basis points, but they have opened lower this morning in tandem with the easing in oil prices (Brent crude is back below $95 p/b, down from a   high of over $97 earlier in the week).  There was also some respite for US equity markets, which rallied by around 0.5%, but European stocks ended in the red for the day, albeit very marginally so.

ECB’s Makhlouf says he feels “uneasy” that Euro area inflation is running north of 3% when the pace of economic growth is “slightly stronger” than forecast. He also notes that “the decision we’re going to make next week will not be a surprise to anybody,” essentially confirming market expectations for a 25bps hike in the deposit rate at the ECB’s meeting this day week.

Fed member Williams says, “the data (on inflation) recently has been encouraging,” adding that he’s “seeing the trend in inflation moving slowly down as some of the effects of tariffs move into the rearview mirror.” Still though, he says the Fed is “collecting a lot of data” ahead of its monetary policy meeting later this month and will “reassess” the outlook for interest rates.

The Day Ahead

For the day ahead, economic data due include the ISM services index (August), trade balance (July), and weekly jobless claims in the US, while producer prices (PPI) for July are scheduled in the Euro area. A number of Fed members are due on the wires over the course of the day. These include Governor Waller, who in July noted that “when inflation is well above its target and the labour market is near full employment…any serious (monetary) policy rule calls for raising the policy rate to bring down inflation.”

Market Commentary

Markets continue to be dominated by an ongoing increase in oil prices – Brent crude has reached $95 per barrel amid another round of attacks in the US-Iran war – which is contributing to a continuing firming of central bank rate hike expectations, rising bond yields, weakness in equities, and a strengthening of the dollar (albeit modest). The euro and sterling have slipped to around $1.1575 and to $1.35 against the US currency, both down around half a cent from yesterday’s best levels. This leaves EURGBP largely unchanged, trading at around £0.8575 this morning.

Yesterdays Events

The firming of central bank rate hike expectations sees the market now pricing in about 75bps of hikes from both the ECB and the Bank of England by the middle of next year, which is 15-25bps more than was the case a week ago, while about 65bps of hikes is priced in for the Fed over the same period, an increase of circa 25bps in the past week (though of course a more ‘hawkish’ Fed has also been a factor here as well). Government bond yields are heading higher again this morning, having increased for a second day running yesterday, with German and UK 10-year yields up around 3-bps at the start of play. Higher bond yields are pressuring equity markets. US indices closed the New York session around 1% lower, while European stocks are slightly lower this morning having shed just over half a percent yesterday.

Headline inflation in the Euro area came in as expected in August, rising to 3.3% from 2.9% in July on the back of  higher energy price inflation. Core inflation (excluding energy and food prices) was slightly lower than expected at 2.4%, down from 2.5% in July,  with a fall in services inflation (to 3% from 3.3%) offsetting a rise in goods inflation (to 1.2% from 0.9%). Overall, the data served to copper-fasten market expectations for a 25bps hike in interest rates from the ECB later this month.

Fed Governor Barr says “with inflation above target for a protracted period, there is a risk of broader price pressures taking hold”. He adds that “if trends in the data give me some confidence that inflation is moderating on a path to 2 percent, then I think we can take a bit more time to assess our policy stance (but) if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise (interest) rates.” The market is currently pricing in a circa 70% chance of a rate hike this month.

The Day Ahead

It is quiet enough economic data-wise today, with the ADP employment report (August), factory goods orders (July) and the Fed Beige Book in the US the main releases of notes, though of course the fallout from developments in the Middle East will remain a focus for markets.

Market Commentary

Government bond yields rose further amid an increase in oil prices – Brent crude is back over $90 per barrel again – and in the wake of Fed Chair Warsh’s ‘hawkish’ speech on Friday. Higher yields weighed on equity markets, with US and European stocks losing ground, while the dollar held onto most of the gains it chalked up at the end of last week as Fed rate hike expectations firmed, finishing just marginally lower on the day. The euro and sterling are trading at around $1.16 and just shy of $1.3550 against the US currency respectively, with EURGBP at about £0.8570 this morning. Euro area CPI data due today are expected to show headline inflation accelerated to over 3% in August, which will copper-fasten market expectations for an ECB rate hike next week.

Yesterdays Events

In government bond markets, US long-dated yields rose by 3-4bps on the day – the benchmark 10-year yield reaching its highest level (4.75%) since early 2025 – though short-dated yields were little changed after surging on Friday post Warsh’s remarks, while German yields were 3-4bps higher across the curve (UK markets were closed for a public holiday). Yields generally are heading north again this morning. In equity markets, European stocks shed almost 1%, reversing much of last week’s gains, while US indices clawed back some ground into the New York close but still ended slightly in the red for the day.

German HICP inflation came in slightly lower than expected in August, according to the flash reading, albeit nudging up to 2.9% from 2.8% in July. Based on the (national) CPI measure, core inflation – which excludes energy and food pieces – was unchanged at 2.4%, with a second consecutive decline in core services inflation offsetting an increase in core goods inflation.

The Day Ahead

Today’s ‘flash’ estimate of inflation in the Euro area is expected to show headline inflation accelerated to 3.3% in August – which would be a new high since the commencement of the Iran war at the end of February – up from 2.9% in July, but core inflation is forecast to be unchanged from July at 2.5%. Other data scheduled include Euro area unemployment for July; the ISM manufacturing index (August) and job openings (July) in the US; and mortgage lending/approvals (July) in the UK. There are a few ECB members due on the wires over the course of the day.

Market Commentary

Friday was very much dominated by Fed Chair Warsh’s much anticipated speech in Jackson Hole. That conference had often been used by previous Fed chairs for major policy speeches but there was a risk Warsh would say very little given his predisposition to less rather than more communication about monetary policy. In the event he did not disappoint, however, and his speech struck a hawkish tone, saying the underlying trends in inflation have not ‘meaningfully improved’ and that the Fed might have ‘work to do’. That sent the dollar higher, with the euro falling from about $1.1650 to around $1.1590 this morning, while sterling dipped from close to $1.36 to $1.3540 now. The euro lost a little ground to sterling, and is now trading around 86.6p. US yields also moved higher as the chances of a near-term Fed rate hike increased, particularly at the short end of the curve.

Yesterdays Events

Warsh’s speech on Friday laid out that he thought that the US economy was in a strong position but inflation had not materially weakened enough. He re-affirmed the Fed’s commitment to a 2% PCE target as a ‘firm fixed target’, thus emphasising the Fed’s commitment to price stability. He said the US economy ‘appears to have strengthened’ and pointed to consumption and investment combined increasing at a rate of nearly 3%, which he said is carrying more ‘signal’ about the economy than headline GDP. Credit markets are ‘showing few signs of restraint’ and where some sectors (agriculture and housing) are showing strains he would be ‘hard pressed’ to describe ‘broad financial conditions as restrictive’. Regarding the labour market, he said he believed the situation was ‘consistent with full employment’.

With the Fed chair laying out that he thought the economy was in good shape and financial conditions were ‘not restrictive’, the key was his views on the inflation environment. He said that ‘progress (on inflation) over the past two years has been modest’ and the numbers were ‘concerning’. He added that ‘PCE and CPI readings were better than expected (but) they do not tell me that underlying trends have meaningfully improved’ and that his standard was that they must be confident that underlying inflation is moving to the (Fed’s price) objective at a ‘clearly sufficient speed’, otherwise the Fed may ‘have work to do’. This sent a clear signal to the market that interest rate hikes are under consideration. Two weeks ago, there was a 55% chance of a 25bps rate hike at October’s FOMC meeting with just one and a half hikes fully priced in by the end of next year. Today, markets are pricing in a 90% chance of an October hike and two hikes are fully priced in by the end of 2027 as well as a 25% chance of a third hike.

Unsurprisingly, US yields moved higher. Two-year yields were up 11bps to 4.35% while 10-year yields were up 4bps to 4.72%. Euro area yields were also up, with two-year German yields up 4bps to 2.9% and 10-year yields up 3bps to 3.28%. US  equities suffered on Friday, led down by tech stocks, with the S&P losing a quarter point on the day and the Nasdaq losing a half point. Better news for European  equities, which outperformed, with the Eurostoxx up nearly 1% for the day and on track for a fifth consecutive monthly gain, and the FTSE up 0.3%.

While the news from Jackson Hole was dominated by Warsh, there were several other notable central bank speakers. ECB member Kocher said that Europe’s economy is ‘more resilient than many think and is gaining momentum’, while adding that there is ‘no complacency’ on inflation. His colleague Dolenc said that growth in Europe was ‘exceeding expectations’, adding there were arguments for a September rate hike. The EU economic confidence data for August was also positive, increasing to 98.4 from 97.1, with both services and industry indices improving. Finally, BoE Governor Bailey played down the chance of a near-term rate hike from the MPC, saying second-round inflation effects are ‘quite subdued so far’ and that he has taken the view that the BoE can ‘watch this situation for the moment’.

The Day Ahead

For the week ahead, we get the ‘flash’ inflation estimate for the euro area, with the consensus forecast at 3.3%, the fastest since May 2023. Also due are euro area unemployment and retail sales. In the US, we get ISM readings and the Fed Beige Book, but the key event will be Friday’s non-farm payrolls for August, with a modest 55k increase as the consensus forecast following an unexpected -23k reading in July. Speakers this week include ECB’s Lane and Nagel, BoE Governor Bailey, and Waller and Barr from the Fed. There will be other central bankers speaking too this week before the ‘quiet’ periods for the ECB and Fed kick in ahead of their respective meetings later in September.

Market Commentary

The main currency pairs are treading water ahead of Fed Chair Warsh’s appearance at Jackson Hole today. The euro continues to trade around $1.1650 against the dollar, sterling remains just below the $1.36 level against the US currency, while EURGBP is largely unchanged at about £0.8575. Though markets are eagerly waiting to hear from Warsh, they are not sure what to expect him to say. Ideally, they would like him to outline his view of the outlook for growth and inflation and, most importantly, the associated implications for monetary policy. They may not get that however, given the new Fed Chair’s preference for refraining from ‘guiding’ markets about the path for interest rates. At the same time though, there is a risk that the less he says, the more markets might ‘punish’ him via a spike in US bond yields (at a time when the latter have been quite volatile). Let’s see what happens!

Yesterdays Events

It was a damp squib in the main government bond markets yesterday with yields flat to marginally higher on the day. In equity markets, the Nasdaq led gains in the US stocks – following the positive earnings results from Nvidia on Wednesday – rising by more than 1.6%, but European stocks underperformed noticeably, with the Stoxx Europe 600 shedding around 0.7% on the day.

ECB member Radev says “September remains open (regarding a rate hike), but based on what we know today, another measured step deserves serious consideration,” adding that “waiting until second-round effects (on inflation) are fully visible could mean acting too late.” He also says that October and December will be ‘live’ meetings for a rate move. Meanwhile, data released earlier this morning show headline inflation in France picked up in August to 2.7% from 2.4% in July, while headline inflation in Spain accelerated to 4.5% from 3.9%. Inflation data for the Euro area as a whole are due Tuesday next week.

Fed’s Hammack repeats her call for an increase in interest rates, saying “it’s appropriate for us to put some (monetary policy) restraint there to help bring inflation back down to target.” She notes that “the longer inflation stays above our (2%) objective, the harder it will be for us to bring it back down.”

The Day Ahead

For the day ahead, the focus will be on Warsh’s speech at Jackson Hole. Economic data-wise, the main releases scheduled are the European Commission’s Economic Sentiment Indicator (ESI) for July in the Euro area and a final reading for the University of Michigan’s August consumer confidence index in the US.

Market Commentary

Slightly firmer than expected US inflation data and a move higher in oil prices (subsequently reversed) contributed to a slight hardening of central rate bank rate hike expectations, an increase in bond yields, and a modest strengthening of the dollar. The euro is trading at around $1.1650 against the US currency this morning, while sterling has dipped below the $1.36 level for the first time in just over a week. EURGBP continues to nudge higher, currently trading at around £0.8575. Attention is turning to Fed Chair Warsh’s appearance at the Jackson Hole economics conference tomorrow, so the ‘price action’ in markets may be limited enough ahead of his remarks.

Yesterdays Events

US government bond yields came off their highs as stocks sold off into the New York close, increasing by 2-3bps on the day, while German and UK yields rose by 4-5bps across the curve.  US stocks finished flat to marginally lower, while European indices ended the day’s session largely unchanged. Nvidia’s results, published after the close of US business, came in ahead of expectations, which should boost sentiment in equity markets at the start of play today.

The annual rate of headline PCE inflation – the Fed’s target measure of inflation – came in a touch higher than expected in July at 3.7%, unchanged from June, on the back of a slightly larger than forecast month-on-month increase in prices of 0.2%. Core inflation, which excludes energy and food prices, was also unchanged in July at 3.3%, with core prices up 0.2% on the month. Core services inflation was marginally lower last month at just under 3.7%, but this was not enough to offset a pick-up in core goods inflation, which rose to 2.3% from 2.1% in June. Fed rate hike expectations firmed slightly following the data with the market now fully pricing in a 25bps increase in the policy rate by the end of this year.

The Day Ahead

For the day ahead, economic data due include money supply/credit growth for July in the Euro and the trade balance (July) and weekly jobless claims in the US. The ECB publishes the minutes of its July monetary policy meeting, at which interest rates were left unchanged.

Market Commentary

Lower oil prices contributed to a decent rally in government bond markets, with yields falling across the curve, while equity markets chalked up modest gains. There wasn’t much action in FX though with the main currency pairs little changed on the day. The euro is trading at about $1.1670 against the dollar this morning, which is more or less where it was yesterday morning, while sterling is marginally lower against the US currency at around $1.3635. This in turn leaves EURGBP marginally firmer at £0.8560. US economic data due today include PCE inflation – the Fed’s target measure of inflation – for July, which should garner plenty of attention.

Yesterdays Events

Reports that Iran and Oman are discussing an arrangement to “manage” the Strait of Hormuz contributed to the decline in oil prices. Brent crude was down around 4% yesterday and is lower again this morning at just under $87 per barrel (having closed out last week at almost $95 p/b). Falling oil prices helped trigger a rally in government bonds, with yields in the main markets falling by around 5-7bps across the curve. In equity markets, the Nasdaq led gains for US stocks, closing around 0.7% higher, while European indices added a bit less than half a percent on the day. Attention now is on Nvidia’s results due after the close of US business today.

ECB member Schnabel says, “at the current policy rate (2.25%), inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary,” adding that, “especially in the current environment of resilient aggregate demand, it is critical to prevent the occurrence of second-round effects early on because acting late could necessitate more tightening.” The market expects the ECB to hike the policy rate by 25bps next month and is pricing in a further 25bps increase by April next year.

Fed’s Collins says she was “comfortable” with the decision to keep interest rates unchanged at the July meeting, noting that “this mildly restrictive policy stance” leaves the central bank “well- positioned to address evolving economic conditions and return inflation to target in a reasonable amount of time.” However she warns that, absent a continuing decline in inflation, it will be necessary to tighten policy and raise interest rates.

The Day Ahead

For the day ahead, as mentioned, the main economic data release is the PCE inflation report for July in the US. The consensus expects the headline rate of PCE inflation to have nudged down for a second month in a row, to 3.6% from 3.7% in June, while the core rate (i.e. excluding energy and food prices) is expected to be unchanged at 3.3%. Other US data due included personal income & spending for July, durable goods orders (also for July), and a second estimate of GDP growth in Q2 – the initial estimate showed the economy grew by 0.4% on the quarter and by 2.1% on the year, after 0.5% and 2.7% respectively in Q1.