Markets
The European Central Bank in a move widely expected kept the policy rate unchanged at 2%. The second no-change outcome straight was unanimous and results from the ECB observing that inflation is currently around the 2% medium target. With the updated forecasts showing inflation to stay there over the policy horizon, there was no need to adjust rates. The ECB penciled in 2.1%-1.7%-1.9% over the 2025-2027 period, to be compared with 2%-1.6%-2% in June. Core inflation expectations stayed pretty much the same as well. Growth for this year was bumped to 1.2% from 0.9%. The first quarter enjoyed a boost from (export) frontloading while domestic consumption remained resilient so far. Current headwinds from a stronger euro, import tariffs and increased competition should fade in 2026. Growth for that year was revised slightly downward to 1% while that for 2027 was kept unchanged at 1.3%. Lagarde noted that risks to growth have become more balanced, an important shift from July when “risks remained tilted to the downside”. Lagarde’s response to the first question in the press conference, whether the easing cycle is over, immediately struck a nerve: “Let me tell you this … the disinflation process is over.” Everything she said afterwards (we’re data dependent, go meeting by meeting …) in the rest of her answer and by extension of the presser can and was easily ignored. Lagarde de facto buried any remaining doubts whether the central bank will lower rates again, barring major shocks. Combined with the upgraded growth risk balance it hurled short-term European rates to intraday highs, leading to net daily changes varying between +1.6 (30-yr) to +4.8 bps (5-yr). The 2-yr swap yield rises to a 5-month high, the German equivalent is on the verge of topping 2%.
In between the statement release and the presser, the US published in-line with consensus August CPI numbers but well-above-consensus jobless claims. The former printed 0.4% on a headline basis, slightly more than the 0.3% expected. The yearly figure matched the anticipated rise to 2.9%. Core CPI came in at 0.3% and 3.1% (same as in July). The core goods excluding new and used vehicles, considered sensitive to tariff-related inflationary pressures, was only up 0.13% m/m, the weakest reading since March and a further deceleration from July’s 0.22%. Other closely watched import-exposed categories such as video & audio products, apparel and household furnishings all showed either a contained price increase, a smaller one than the month before or both. Services inflation added a July-matching 0.3% m/m whereas some feared this category would come in hot. The numbers came together with a significant uptick in jobless claims to 263k, the highest since late 2021 when the numbers were still normalizing from the Covid spike. It’s seen as evidence of a weakening labour market and boosted Fed rate cut expectations. Three 25 bps cuts are now fully priced in for this year with some adding to bets for a 50 bps move next week. The ECB and US data help give the euro the upper hand over the dollar, though given the yield differentials gains could have been larger. EUR/USD bounces of an upward sloping trend line towards 1.172. The 1.1829 July multiyear remains out of reach so far.
News & Views
The Norges Bank today published its Q3 Regional Network report, important input for its policy meeting Thursday next week. According to the report, full capacity utilization (at 35%) was little changed from the previous surveys. Overall, contacts expect output growth to remain fairly stable in the period between Q3 2025 (0.4%) and Q4 2025 (0.4%) Many expect higher household purchasing power to strengthen demand. Some contacts expect growth in residential construction to boost activity. A number of contacts point out that there is still uncertainty related to international trade barriers and some cite greater customer caution. Contacts expect somewhat higher investment in 2025 (1.1% from -0.9% previously) than in 2024 and growth to remain firm in 2026 (1.6%). At 25%, contacts reporting recruitment difficulties rose slightly. They also see further employment growth both in Q3 and Q4 (0.2%). Wage growth is estimated at 4.5% this year and 4% next year. Combined with higher than expected August (core) CPI data published yesterday, the survey outcome poses questions whether the NB will already reduce the policy rate further next week. The Norwegian krone strengths modestly further today (EUR/NOK 11.615).
