Today, preliminary German HICP inflation in August is ticking in. We expect it to stay fairly stable around zero, given that German VAT was adopted in July.
Fed Vice President Clarida talks about ‘US monetary policy’. Given his importance in the FOMC, we look forward to hearing his views on the Fed’s new average inflation measurement regime and perhaps indications of what it intends to do at the forthcoming September meeting to ensure that the new regime is credible.
Very early Tuesday morning we get the private Chinese PMIs. After the solid reading of the official PMIs today, we expect the private ones to stay well in an expansive area tomorrow.
60 second overview
Macro. The official Chinese PMIs this morning point to a continued rebound in the Chinese economy. While the production PMI remained at 51, the service PMI rose higher to 55.2, which was higher than expected. In general, the PMI release is good news for the global economy and European exports, as the second largest economy sees a solid recovery.
On another note, China over the weekend tightened its export rule to include technology-related companies. This could make it more difficult for TikTok to sell its US subsidiary before the deadline set by the US government on September 15, which could lead to renewed tensions between the US and China if such a sale is not carried out.
Japan. On Friday, Prime Minister Shinzo Abe announced that he would resign due to health concerns. The search for a successor begins now, which could take weeks and create uncertainty about economic policy. The JPY strengthened on Friday.
Equities. Asian stocks are rising higher after the solid Chinese PMI release this morning and continue the positive US session. Part of the optimism comes after the Fed on Thursday announced a new monetary policy framework, which in our view will keep global reflection afloat, supporting risk values. Stock futures point to a positive opening in the US and Europe today.
FI. The start of the issue season in Europe combined with drivers for the new Fed strategy that led to higher US interest rates, marked the interest rate markets last week with sales of approx. 10-15bp in most jurisdictions. We expect the ECB to start upscaling QE purchases this week, both in government bonds but also in hedging and corporate space, as the ECB can participate in the primary market. When we read Markets EUR, we take a closer look at supply versus demand for the rest of the year. We expect the high buying pace to be very supportive of the spreads in the future, and we recommend investors to participate in the new offers such as 10Y Finland, even though the spreads are tight compared to the levels in June.
FX. How long can the market trade with the Fed’s introduction of AIT? Based on inflation markets, it is not yet in the price that the Fed will deliver an inflation overrun in the coming years. On this side of the FOMC meeting on 16 September, it may take a leap of faith to remain long EUR / USD amid protracted positioning and lack of detail on how the Fed plans to pursue its new AIT target.
Credit. Sentiment rose in the credit market towards the end of Friday’s trading session, prompting iTraxx Xover to expand 4bp during the day, while Main finished half a basis point wider.
Nordic macro and markets
Yesterday, the Danish government announced an updated borrowing requirement for 2020 and the first forecast for 2021. The full budget overview is published today. In the updated borrowing requirement for 2020, the forecast was revised upwards by DKK 70 billion. DKK from 294 billion. To 374 billion. We had expected a downward adjustment of the borrowing requirement as it has not spent anything close to the expected amount back in May. Instead, the government revised the borrowing requirement due primarily to “payment of holiday allowance (Holiday pay), as well as further deferral of fees agreed since Economic Survey, May 2020”. However, the negative public finances for 2020 will change dramatically in 2021, when the government expects a surplus on the net financing need of DKK 65 billion. Kr. (Against a deficit in 2020 of DKK 248 billion). Therefore, the borrowing requirement falls from DKK 374 billion. Kr. In 2020 to 209 billion. Kr. I 2021.
Today is a busy day on the data front in Denmark: National accounts for the second quarter, property prices in June and unemployment figures for July, while the government is scheduled to present its budget, the latest economic survey and its fiscal policy framework until 2025. Q2 surprised negatively two weeks ago with a decline of approx. 7.4% compared to Q1. The full national accounts should inform us in more detail what exactly caused this record fall.
Danish gross unemployment has risen from 3.7% to 5.5% of the labor force since February. However, daily figures from the Ministry of Employment point to the number of unemployed remaining more or less stable in July and falling in August. Therefore, we do not expect any major movement in Monday’s unemployment figures.