Markets to Watch This Week: Inflation to Support Hawkishness… For Now

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves

Despite a relaxed US calendar, we had expected a busy week headlined by the European Central Bank (ECB). We got more than we had bargained for. Tuesday saw Liz Truss become the Prime Minister of the UK, though by a smaller margin than most had assumed – her loose fiscal and tight monetary policy stances should eventually benefit GBP. And by mid-week, the Reserve Bank of Australia (+50bps) and the Bank of Canada (+75bps) had both hiked their policy rates – find our outlook on the two here.

Thursday lived up to expectations. By mid-afternoon, the ECB had hiked its policy rate to 1.25% (+75bp) as Henry, and our Hive Minds Slack channel, had expected. Henry sees this as the start of what should be a more hawkish ECB, which could eventually hike to at least 3%. The markets reacted by aggressively selling the German 2Y, its yield rose 22.6bps WoW (Charts 1 and 2). It was not the only market-moving event, Japanese finance officials proposed intervening in JPY as it approached all-time levels of weakness (Chart 3).

However, all news was dwarfed by the death of Queen Elizabeth II. The UK has now entered a period of mourning, which means the Bank of England will not meet until 22 September, while UK markets will also close on 19 September, the day of her funeral.

On the final day of the working week, EU energy ministers agreed to protect consumers but stopped short of any concrete details. European natural gas prices (194 EUR/MWh) are now lower than they spiked to in March 2022.

The Week Ahead

Inflation data dominates this week. US inflation is expected to increase at a slower pace through August (8.1% YoY) than in July (8.5% YoY) while core inflation is expected to have risen 6.1% YoY through August, faster than the 5.9% YoY increase through July. Overall, Dominique is looking for a stabilisation of core goods inflation, an increase in core services inflation, and a recovery in median price inflation.

In Europe, final Eurozone CPI numbers for August should provide more context to the growing breadth of price rises across the bloc. The data release will be accompanied by a myriad of ECB speakers across the dovish-hawkish spectrum; they will help us understand the pivot to 75bp and their views on medium-term inflation. Sweden’s inflation (CPIF) numbers will also be released, we expect them to remain above Riksbank forecasts.

Meanwhile, inflation is just one of many releases in the UK this week. Henry expects UK data to show a continued need for tightening (he expects +50bp on 22 September) – but the clock is ticking before his expected BoE November dovish pivot.

For further analysis, see our week-ahead preview, and watch Andrew and Dominique discuss whether a soft landing is possible as well as thoughts around upcoming data.