Eurozone inflation surprises on the upside

CPI inflation in the Eurozone came in above expectations for the August print at 5.3% y/y. This was the same pace of price growth as in July but was higher than the consensus prediction of 5.1%. Prices were 0.6% higher than the previous month, compared to a 0.1% drop in July. The upside surprise was well signposted by inflation prints from Germany and Spain on Wednesday and France earlier yesterday, where headline CPI was at 5.7%, up from 5.1% in July and higher than the predicted 5.4%. Following on from the hawkish commentary from ECB officials at Jackson Hole last week, the likelihood remains that the ECB’s hiking cycle still has further to run.

The Chinese government has announced more economic support measures, following on from other measures earlier in the week. The amount of FX deposits banks have to hold has been cut to 4.0%, from 6.0% previously, as a measure to support the yuan. Meanwhile, the Caixin manufacturing PMI survey surprised to the upside this morning as it came in above the neutral 50.0 level at 51.0, beating predictions of 49.0 and up from 49.2 last month. This was the highest reading since February for the index and follows a slighter contraction that expected in the official PMI survey released yesterday.

In the US, the PCE deflator rose to 3.3% y/y in July, up from 3.0% in June and in line with expectations. The core measure ticked up to 4.2%, from 4.1% previously. Both measures were up 0.2% m/m. The second consecutive month of 0.2% m/m growth suggests that the Fed’s work is starting to pay off, although consumer spending came in higher than anticipated at 0.6% m/m, compared to consensus prediction of 0.5%. Meanwhile in the labour market initial jobless claims were 228,000 in the week to August 26, a little lower than the previous week’s 232,000 and the predicted 235,000.

Petrol prices in the UAE will rise by almost 10% m/m in September, as both crude oil and refining margins increased in August. 95-octane petrol will cost 3.31 dhm/l, up from 3.02 dhm/l in August. The petrol price is up 0.3% y/y after six months of annual price declines. If petrol prices remain at current levels through the rest of the year, transport costs will put upward pressure on overall consumer inflation in Dubai in Q4 2023, after being disinflationary since March.

Turkey saw real GDP growth of 3.8% y/y in Q2, stronger than the predicted 3.1% growth, and marginally slower than the first quarter print of 3.9%/ On a quarterly basis, growth was 3.5% q/q, compared with the previous print of -0.1%. While growth has held up well through the first half of the year, boosted in part by an uptick in consumer and government spending (government spending was up 6.1% y/y in H1 and 5.3% in H2) ahead of May’s elections, it will likely slow through the second half in the new much tighter monetary policy environment.

Today’s Economic Data and Events

• 9:00 India manufacturing PMI, August
• 11:00 Turkey manufacturing PMI, August
• 16:30 US Nonfarm payrolls, August. Forecast: 170,000
• 18:00 US ISM manufacturing survey, August. Forecast: 47.0

13:00 Eurozone CPI inflation, % y/y, August. Forecast: 5.1%

Fixed Income

• US Treasuries extended their gains for the week overnight with yields lower across the curve. The 2yr UST yield fell 2bps to 4.8629% while the 10yr yield had a downward bias to close at 4.1081%. The 2s10s curve steepened by a bit less than 2bps to -76bps. European bonds moved higher in response to a slowing but still elevated inflation print for August. Yields on 10yr bunds fell 8bsp to 2.459% as markets price out the probability of another hike from the ECB at the September 14 meeting.
• Emerging market bonds settled a little softer overnight with both Turkey and South Africa 10yr local currency markets selling off. Turkey 10yr yields added 9bps to 20.53% while the 10yr South African yield added 6bps to 11.693%.
• The Egypt 5yr CDS widened out about 71bps overnight to its highest level since the end of June. Turkey’s CDS also moved higher, up 10bps.

FX

• The steady headline inflation print for the Eurozone in August has priced out expectations of an imminent move from the ECB at their September meeting. EURUSD dropped 0.7% overnight to close at 1.0843 with limited data between now and the ECB’s decision. The single currency may drift a little lower until it is clearer from the ECB if they will hike again to deal with inflation that is still above 5%. Sterling also closed lower, down 0.4% at 1.2673 while USDJPY moved in favour of the yen, down 0.5% at 145.54.
• Commodity currencies were broadly stronger overnight with USDCAD down 0.2%, its fourth day of gains for the loonie, with the pair settling at 1.3508. AUDUSD added 0.1% to 0.6484 while NZDUSD gained 0.2% to 0.5987.

Equities

• Equity markets were somewhat weaker yesterday. In Europe, they were weighed down by the upside surprise on inflation and the composite STOXX 600 ended the day down 0.2%, although the DAX managed to end the day 0.4% higher.
• In the US, the NASDAQ edged higher with a 0.1% gain, but both the S&P 500 (0.2%) and the Dow Jones (0.5%) ended down.
• Locally, the DFM added 0.4% and the ADX 0.7%. By contrast, the Tadawul ended down 0.7%.

Commodities

• Oil prices extended their gains for the week so far overnight with a 1.2% rise in Brent futures to USD 86.86/b and WTI adding 2.5% to USD 83.63/b. August represented a third monthly gain in a row though at just 1.5% for Brent and 2.2% for WTI the gains were far more muted than the moves in July.
• Russia has said it will continue to cut export volumes according to a statement from deputy prime minister Alexander Novak. He did not commit to the scale of cuts but confirmed that it would be to extend Russia’s voluntary additional cuts into October.