US futures and global stocks were broadly higher to start the week, helped by the biggest drop in the US dollar in two weeks following hawkish commentary from the BOJ, with trader sentiment also lifted amid improving Chinese data (the latest monthly credit data solidly beat estimates) and comments from Treasury Secretary Janet Yellen suggesting a soft landing is likely (this coming from the person who 6 years ago said no financial crisis in her lifetime).

As of 7:45am ET, S&P 500 futures which rolled to the Sept contract, were higher by 0.4%, while Nasdaq 100 futures rose 0.7% boosted by a surge in Tesla which got a major upgrade by Morgan Stanley. US gains were paced by Estoxx 50 where real estate sector leads gains day while Asian stocks were mixed. The dollar’s record 8-week hot streak was under threat as the yen and yuan rose about 1% after comments from the Bank of Japan and the People’s Bank of China boosted those currencies, respectively. Bank of Japan Governor Kazuo Ueda aired the possibility of ending the developed world’s last key negative interest rate. US Treasury yields climbed, gold was up 0.48%, the most in two weeks, and oil dipped.

In premarket trading, Tesla rallied as much as 6.1% after an upgrade from Morgan Stanley (available to pro subs in the usual place) forecast that the Dojo supercomputer may add as much as $500 billion to the company’s market value through faster adoption of robotaxis and network services.  Twinkie maker Hostess Brands soared over 9% after the Wall Street Journal reported that JM Smucker is nearing a deal to buy Twinkie owner, and the company subsequently confirmed. Here are the other notable premarket movers:

• Block gains 1.2% after Baird analyst David Koning said the stock’s oversold after last week’s slump on a systems outage issue and named it a bullish fresh pick.
• Canopy Growth shares jump 12%, putting the marijuana company on track to extend advance for a second session. The stock soared on Friday amid a run of gains on renewed hopes that the SAFE Act on cannabis banking will move forward in Congress soon.
• Crinetics Pharma rose as much as 33% after the pharmaceutical company said its oral, once-daily investigational compound Paltusotine achieved positive results by meeting the primary endpoint and all secondary endpoints of the Phase 3 study.
• CymaBay Therapeutics shares are down 5.5% after the company said it has started an underwritten public offering of about $150 million of its common stock and pre-funded warrants.
• Microsoft is up 0.8% after Citi opened a positive catalyst watch on the stock, seeing “a rich catalyst path ahead” for the software giant.

Taking a closer look at the MS upgrade of TSLA, Adam Jonas predicted that Tesla's Dojo supercomputer may add as much as $500 billion to the company’s market value through faster adoption of robotaxis and network services, according to Morgan Stanley. Dojo can open up “new addressable markets,” just like AWS did for Amazon.com Inc., the MS analysts wrote, upgrading the stock to overweight from equal-weight and raising its 12-month price target to a Street-high $400 per share from $250. The supercomputer, designed to handle massive amounts of data in training driving systems, may put Tesla at “an asymmetric advantage” in a market potentially worth $10 trillion, said Jonas, and could make software and services the biggest value driver for Tesla from here onward. TSLA shares of Tesla rose as much as 6.1% in US premarket trading Monday. The stock was on track to add about $46 billion in market value. Morgan Stanley is one of Musk’s key advisory firms, including on the $44 billion takeover of Twitter.

Elsewhere, Reuters reported that Arm Holdings was considering raising the price range of its initial public offering after meeting investors for what would be the world’s largest listing this year, according to people familiar with the matter. The SoftBank Group Corp.-owned chip designer’s share sale is about six times subscribed, said the people, who asked not to be identified as the information is private.

The big driver of risk overnight was the sharp drop in the USD, which tumbled the most in two weeks and is in jeopardy of ending its record stretch of 8 weeks of gains. The yen had the biggest move against the dollar, surging more than 1% after Bank of Japan Governor Kazuo Ueda aired the possibility of ending the developed world’s last key negative interest rate.

"This dollar weakness is definitely a bull case for markets,” Beata Manthey, global equity strategist at Citigroup Inc. said in an interview on Bloomberg Television. “Let’s see what the week brings in terms of monetary policy decisions.”

Also over the weekend, Janet Yellen said she’s increasingly confident the US will be able to contain inflation without major damage to the job market (which of course is terrible news from the person who 6 years ago predicted "no new crisis in her lifetime"). She also played down any risk from China’s efforts to increase the sway from the BRICS grouping of major emerging nations. “Every measure of inflation is on the road down,” Yellen said.

In China, there are hints that the economy may be stabilizing after a sharp downturn. Strong credit data published Monday showed recent steps to bolster the real estate market may be starting to lift household demand for mortgages, while corporate loans also picked up. The yuan rebounded from a 16-year low after the People’s Bank of China delivered a strong verbal warning to speculators. Policymakers also set a daily fixing that was stronger-than-expected. The benchmark CSI 300 Index rose 0.7% on Monday, snapping a four-session losing streak. “If the soft-landing scenarios overtake, it could be time to be overweight on emerging markets,” Citi’s Manthey said. “For now being overweights parts of commodity space is enough.”

Europe’s Stoxx 600 rose 0.3%, with the FTSE MIB outperforming peers, adding 0.6%, FTSE 100 lags, adding 0.3%. Italian banks led gains among European lenders after a report that the government is weighing changes to a controversial tax on banks’ windfall profits. Here are the most notable European movers:

• Covestro shares rise as much as 4.2% after saying it has decided to enter open-ended discussions over a potential takeover by Abu Dhabi National Oil Co.
• Italian bank shares climbed, leading gains among European lenders, after Corriere della Sera newspaper reported that the government is weighing changes to the controversial tax on banks’ windfall profits it unveiled last month.
• Vistry shares rise as much as 18%, the most since April 2020, after co. says it plans to focus solely on building homes for affordable housing providers and rental landlords, exiting private homebuilding in the UK.
• JCDecauxshares gain as much as 10%, the biggest jump since November, after a rating upgrade from Oddo BHF on its solid growth trend despite the sluggish Chinese market.
• Restaurant Group shares rise as much as 7.2% to the highest in almost four months after the UK hospitality company said it plans to sell its leisure business to the Big Table Group. The move sharpens the firm’s strategic focus to pubs, concessions and its Wagamama chain, according to Jefferies.
• GSK shares gain as much 2.7% to their highest level since late June, after Barclays highlighted a strong launch for the pharmaceutical firm’s key adult RSV vaccine Arexvy which suggests is taking a lion’s share of the market compared with Pfizer’s competing offering.
• European mining shares rallied in Europe, lifted by a strong run in copper, iron ore and other metals boosted by Chinese credit data and dollar weakness.
• Alfa Laval shares decline as much as 4.1%, the most since March, after Citi analysts cut their recommendation for the Swedish industrial group to neutral, saying they expect slower order growth in the near-term.
• Electrolux shares jump as much as 2.9%, the biggest intraday gain since June 27, after the home appliance manufacturer was upgraded to neutral from sell at Citi. Meanwhile, Legrand and Alfa Laval are downgraded to sell and neutral, respectively.
• Siemens shares fall as much as 1.4% after the stock was rated underweight by Barclays, which resumed coverage of company, and HSBC downgraded the German industrial giant to hold from buy.
• Gimv shares drop as much as 3.2% after the Flemish government approves selling the region’s stake in the investment firm, Belgian financial daily De Tijd reports, citing Flemish Finance Minister Matthias Diependaele.

Earlier in the session, Asian stocks were mixed as equities in Hong Kong slumped upon trading resumption, while financial shares in Japan rallied amid higher yields. The MSCI Asia Pacific Index was little changed after opening higher.

• MUFG and other Japanese financial stocks lent the biggest support as comments from the Bank of Japan’s governor pushed up yields, which in turn boosted lenders. Japan’s broader equity benchmarks remained under pressure as the yen strengthened.
• Stocks in Hong Kong fell the most as the market reopened after Friday trading was canceled due to a heavy rainstorm. Alibaba was a major drag on key gauges after its former CEO Daniel Zhang stepped down from the cloud business. Chinese stocks climbed to snap a four-day loss following a spate of positive news including easing deflationary pressure and the regulator pledging more measures to support capital markets. Conversely, the mainland was kept afloat following somewhat mixed inflation data from China which showed headline CPI Y/Y was softer than expected but no longer in deflationary territory and the latest loans and financing data topped forecasts, while China’s National Administration of Financial Regulation also eased rules for insurers to buy stocks.
• Australia's ASX 200 was rangebound with gains in the top-weighted financial industry making up for the underperformance in the tech and healthcare sectors.

Over the weekend, in a series of rambling, disjointed speeches, Joe Biden said China’s recent downturn has left President Xi Jinping with “his hands full,” and that could diminish any inclination by Beijing to invade Taiwan. Biden was speaking in Vietnam, where he traveled after the G20 summit, where he met with Chinese Premier Li Qiang. Pressed on why he hasn’t met with Chinese President Xi Jinping in 10 months, Biden said Xi “has his hands full right now.” The Chinese president opted not to attend the G-20, giving no explanation. “China has a difficult economic problem right now for a whole range of reasons that relate to international growth and lack thereof, and the policies that China has followed,” said Biden during a press conference in Hanoi, adding, “I don’t think it’s going to cause China to invade Taiwan, matter of fact the opposite, probably doesn’t have the same capacity as it had before.”

In FX, the Bloomberg Dollar Spot Index fell as much as 0.6% after rising a eighth straight week last week, its longest streak in data going back to 2005; the Aussie dollar and yen led gains. The PBOC warned speculators to steer clear of the yuan within hours of forceful guidance with its daily reference rate. BOJ governor Kazuo Ueda said ending the negative-interest-rate policy was an option if wages and prices keep going up, sending the yen soaring. “Policymakers in Japan and China are putting up more resistance to further weakness in their currencies,” said David Forrester, a senior strategist at Credit Agricole CIB in Singapore. “A strong CNY fixing and some hawkish comments by BoJ Governor Kazuo Ueda set the tone for a weaker USD across the board.” Most emerging-market currencies advanced and a gauge of developing-nation stocks jumped by the most in a week, led by Chinese shares.

In rates, US treasuries dropped following the selloff in JGBs with long-end yields near cheapest levels of the session following comments from BOJ Governor Ueda, and curve spreads steeper. 10-year yields around 4.30% are cheaper by ~4bp vs Friday close; gilts lag by ~2bp while bunds broadly keep pace; front-end outperformance in US steepens 2s10s by ~3bp. Dollar IG issuance slate includes five names; syndicate desks are looking for around $30 billion in sales this week, with a bulk of the volume anticipated ahead of Wednesday’s inflation data. European yields also edged up, led by the long end, with UK gilts underperforming. Comments from BoJ Governor Ueda which lifted the 10yr JGB yield to above 0.70% for the first time since 2014 although further downside in the index was stemmed as banks were lifted on the exit-related talk and with Japan aiming to take drastic economic stimulus measures.

The US Treasury auction cycle begins with $44b 3-year note offering at 1pm New York time, followed by 10- and 30-year sales Tuesday and Wednesday. US economic data includes August NY Fed 1-year inflation expectations at 11am; CPI, PPI, retail sales and industrial production are ahead this week. Focal points of US session include 3-year note auction and potential for another heavy corporate new-issue slate; Fed officials are in self-imposed quiet period ahead of Sept. 20 policy decision.  

In commodity markets, copper, iron ore and other metals also got a boost from the weakness in the greenback, while improved Chinese data aided sentiment.

Bitcoin is a touch softer on the session, holding just below the USD 26k mark. Action comes despite a softer USD but continues the recent sessions performance for Bitcoin where the bias has been for incrementally lower trade.

It's a busy week with a raft of news that could shape the direction of markets. On Thursday, the European Central Bank is expected to announce its policy decision. A Bloomberg survey showed an almost even split between economists anticipating a 10th consecutive hike and those anticipating a “hawkish pause.” U.S. inflation data is also due on Wednesday, which may be pivotal before the Federal Reserve meets on Sept. 19.

Market Snapshot

• S&P 500 futures up 0.4% to 4,479.50
• MXAP up 0.5% to 161.74
• MXAPJ up 0.3% to 504.12
• Nikkei down 0.4% to 32,467.76
• Topix little changed at 2,360.48
• Hang Seng Index down 0.6% to 18,096.45
• Shanghai Composite up 0.8% to 3,142.78
• Sensex up 0.5% to 66,959.35
• Australia S&P/ASX 200 up 0.5% to 7,192.32
• Kospi up 0.4% to 2,556.88
• STOXX Europe 600 up 0.6% to 457.26
• German 10Y yield little changed at 2.62%
• Euro up 0.3% to $1.0729
• Brent Futures down 0.4% to $90.31/bbl
• Gold spot up 0.4% to $1,926.31
• U.S. Dollar Index down 0.43% to 104.64

Top Overnight News

• China escalated its defense of the yuan by delivering a strong verbal warning after forceful guidance with its daily reference rate, moves that pushed the managed currency away from a 16-year low.
• The Bank of Japan turned to its loans-for-bonds program to curb rising yields after the governor’s comments on the negative interest rate policy sparked a rout in the nation’s debt market.
• China said that Premier Li Qiang used a meeting with President Joe Biden at the recent Group of 20 summit to urge the US to see the possibilities that his nation’s advances offer.
• The European Central Bank will remove a capital surcharge on some lenders after they addressed shortcomings in their leveraged finance businesses.
• The European Commission cut its outlook for the euro-area economy, predicting it will be dragged down this year by a contraction in Germany.
• UBS Group AG is cutting hundreds of wealth jobs in Asia just months after completing its takeover of rival Credit Suisse as the bank responds to muted client activity and China’s slowing economy.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks traded mixed as yields climbed following comments from BoJ Governor Ueda who said that the BoJ cannot rule out that they might have sufficient data by year-end to determine whether they can end negative rates and that his focus is on a quiet exit. ASX 200 was rangebound with gains in the top-weighted financial industry making up for the underperformance in the tech and healthcare sectors. Nikkei 225 was subdued after the comments from BoJ Governor Ueda which lifted the 10yr JGB yield to above 0.70% for the first time since 2014 although further downside in the index was stemmed as banks were lifted on the exit-related talk and with Japan aiming to take drastic economic stimulus measures. Hang Seng and Shanghai Comp were varied with the Hong Kong benchmark pressured as last Friday’s losses caught up to the index following the black rainstorm closure and with declines led by weakness in the property sector, while Alibaba shares also suffered after its former CEO Daniel Zhang stepped down from the cloud business. Conversely, the mainland was kept afloat following somewhat mixed inflation data from China which showed headline CPI Y/Y was softer than expected but no longer in deflationary territory and the latest loans and financing data topped forecasts, while China’s National Administration of Financial Regulation also eased rules for insurers to buy stocks.

Top Asian News

• BoJ Governor Ueda said they cannot rule out that they might have sufficient data by year-end to determine whether they can end negative rates and that his focus is on a quiet exit, while he noted they will end negative rates if they judge that achieving the price target becomes possible and that they will keep ultra-easy policy for now. Furthermore, he stated that there are various options they can take if economic growth and inflation overshoot expectations, as well as noted that the BoJ will work with the government to assess the impact on the economy and prices regarding recent yen declines, according to an interview with Yomiuri.
• Japanese PM Kishida confirmed he plans to reshuffle the cabinet and to conduct personnel change at the party leadership, while he added that they aim to take drastic economic stimulus measures, according to Reuters.
• Japanese PM Kishida and South Korean President Yoon agreed to work on the resumption of a three-way summit with China, according to Reuters.
• Chinese Premier Li said G20 countries should step up macro-economic policy coordination and China will resolutely deepen reforms and opening up. Furthermore, Premier Li said China and Europe should unite and provide stability amid global uncertainties.
• China’s National Administration of Financial Regulation will make it easier for insurers to buy stocks with the risk weighting of insurance companies’ investment in component stocks of the CSI 300 index and stocks listed on the STAR Market to be lowered, according to Bloomberg citing a statement.
• White House official said it is incumbent on China to explain why its leader was not present at the G-20 Summit and it is unfortunate if China was not committed to the bloc’s success.
• European Council President Michel met with Chinese Premier Li and confirmed a shared interest in holding an EU-China summit by year-end, according to Reuters.
• Italian PM Meloni told Chinese Premier Li about Italy’s plan to quit the Belt and Road Initiative, according to Italian media cited by Reuters.
• UK PM Sunak said he raised strong concerns over any interference in Britain’s parliament with Chinese Premier Li and said any interference would be unacceptable.
• UK and Singapore signed a new strategic partnership to boost economic growth and strengthen security, according to a UK government statement.
• Japanese Chief Cabinet Secretary Matsuno says monetary policy specifics are up to the BoJ to decide; expects the BoJ to closely communicate with the government and conduct policy appropriately.

Top European News

• UK PM Sunak faces a new Cabinet rift after he hinted at curbing benefit increases next year and cast doubt on the pensions triple lock, according to The Sun.
• British Chambers of Commerce survey showed that small and medium-sized enterprises in the UK are completely unprepared for an impending ‘avalanche’ of fresh EU regulations and taxes such as next month’s EU green tax and obligations related to the EU’s VAT regime that kick in from 2025, according to FT.
• UK trade unions are to challenge anti-strike laws at the UN watchdog, according to FT.
• Italy reportedly could amend the 40% tax on banks’ windfall profits which was unveiled last month.
• ECB to remove leveraged loan capital add-ons for some banks as they have dealt with shortcomings in their leveraged finance units, via Bloomberg citing ECB's Enria.
• S&P affirmed Portugal at BBB+; Outlook Revised to Positive from Stable.
• Greece has been upgraded to BBB at DBRS Morningstar; i.e. to investment grade from junk.
• EU Commission sees EZ GDP growth at 0.8% in 2023 (prev. 1.1%), 1.3% 2024 (prev. 1.6%); Sees EZ inflation in 2023 at 5.6% (prev. 5.8%), 2024 inflation 2.9% (prev. 2.8%)

FX

• Dollar under pressure from Yen and Yuan as BoJ Governor hints at potential end of NIRP and PBoC sets most skewed midpoint fix ever.
• DXY sub-105.000 within 104.890-520 range, USD/JPY slips to 145.92 from 147.27.
• USD/CNY and USD/CNH retreat towards 7.2700 and 7.2900 respectively from 7.3250+ and 7.3660; modest further Yuan upside seen on the most recent Reuters source reports.
• Aussie and Kiwi latch on to Yuan rebound and reclaim 0.6400/0.5900 handles vs Buck.
• Sterling, Loonie, Euro and Franc all firmer against Greenback around 1.2500, 1.3600, 1.0700+ and circa 0.8900.
• PBoC set USD/CNY mid-point at 7.2148 vs exp. 7.3437 (prev. 7.2150)
• PBoC held an FX mechanism meeting in Beijing and said it is confident to maintain the stability of the yuan, while it noted that China's FX self-regulatory body stated the yuan exchange rate has a solid basis to stay at reasonable and balanced levels. Furthermore, the body pledged to take actions when needed to correct one-sided and pro-cyclical activities and said it will resolutely fend off currency overshooting risks.
• PBoC will scrutinise bulk dollar buying of USD 50mln and above; purchase of USD 50mln and above will need approval from PBoC, via Reuters citing sources.

Fixed Income

• Debt futures remain depressed, but off worst levels as JGBs regroup from BoJ-inspired lows.
• Bunds circa 25 ticks adrift, Gilts around 50 ticks below par and T-note -5/32 within 130.92-66, 94.62-28 and 109-29/20 respective ranges.
• UK DMO plans a sale via tender of the 0.125% 2073 Gilt, to take place on September 27th; moves 0.125% 2051 I/L to November 8th (prev. 25th) due to the budget.

Commodities

• WTI and Brent are in the red as the pullback during the latter half of last week continues, despite broader sentiment being generally constructive.
• Base metals are bolstered by the latest data from China and strong performance in associated trade while precious peers are also firmer as the USD wanes
• Iraq set October Basrah medium crude OSP to Asia at a premium of USD 1.80/bbl vs Oman/Dubai average and set OSP to Europe at a discount of USD 2.55/bbl vs dated Brent, while it set OSP to North and South America at a discount of USD 0.35/bbl vs ASCI.
• The Iraqi Oil Minister said no agreement was reached with Turkey to immediately resume Iraq’s northern oil exports,** while he also said that average daily oil production is at 4.23mln bpd with exports averaging 3.35mln bpd.
• Libya’s Ras Lanuf, Zueitina, Brega and Es Sider oil ports were closed on Saturday evening for three days due to an expected hurricane, according to Reuters citing oil engineers.
• India and Saudi Arabia are likely to sign an energy cooperation MOU on Monday, while Saudi Crown Prince MBS announced the signing of an MOU for an economic corridor between India, the Middle East and Europe which will include pipelines for electricity and hydrogen.
• US and Saudi Arabia are in talks to secure metals for EVs, according to WSJ.

Geopolitics

• Ukrainian President Zelensky said Ukrainian troops had advanced on the southern front in the past week and there was also movement in the east near Bakhmut, according to Reuters.
• US is reportedly nearing a decision on sending long-range missile ATACMS to Ukraine for the first time, according to officials cited by ABC News.
• Russian Foreign Minister Lavrov said there are ideas for other regional organisations to join the G20 and said that the de-dollarisation process has already started including with India, while Lavrov also said that they regret the decision by Armenia regarding plans for military drills with the US, according to Reuters.
• European Council President Michel criticised Russia for its cynicism in pulling out of the Black Sea grain deal and said Russia’s offer of a million tons of grain to African countries was a parody of generosity.
• Turkish President Erdogan said they discussed the issue of the Black Sea grain deal in great detail and any initiative that isolates Russia is bound to fail. Erdogan also stated that Russian President Putin is ready to send grain to poor countries and Qatar also agreed, while he noted it is not hopeless regarding reimplementing the grain deal and the process can start again.
• Romanian Defence Ministry said pieces of a drone similar to those used by the Russian army were found in Romanian territory on Saturday.
• Azerbaijan’s Defence Ministry said Armenian forces fired on Azerbaijani army positions and the Azerbaijani army took retaliatory measures. In relevant news, Nagorno-Karabakh separatist authorities said a deal was reached with Azerbaijan to restore transport on the Lachin corridor by Russian peacekeepers and Red Cross. However, an Azerbaijani presidential adviser denied a deal to reopen the Lachin corridor but said the road to Azerbaijan will open for aid shipments regardless, according to Reuters.
• US Navy said US and Canadian warships sailed through the Taiwan Strait on Saturday, according to Reuters.
• Taiwan's Defence Ministry said 10 Chinese air force planes crossed the Taiwan Strait Median Line during the past 24 hours, while it noted a Chinese aircraft carrier group is to Taiwan's southeast and heading to the western Pacific.
• North Korean leader Kim and the Chinese delegation to North Korea shared views on intensifying multi-faceted cooperation.
• Russian President Putin sent a letter to North Korean leader Kim and stated that the two countries’ relations will expand in all aspects on common efforts, according to KCNA.
• N. Korean Leader Kim and Russian President Putin could hold a summit on September 13th, via YTN citing a S. Korean source.

DB's Jim Reid concludes the overnight wrap

If last week was a bit light on important data, you can't say the same about this week's high-impact extravaganza that will occur in a Fed blackout period as next week's FOMC lurks in the wings. US CPI (Wednesday) will be the obvious standout but US PPI and retail sales (Thursday) are nearly as important given how some of the PPI subcomponents feed into the Fed's preferred core PCE, and for retail sales, we’ll see how much momentum has been lost after a phenomenally strong July print. If that's not enough, the ECB see their first "in the balance" meeting of this cycle on Thursday with markets now pricing in a 38% likelihood of a hike this morning. Elsewhere, the UK sees employment data (tomorrow) and monthly GDP (Wednesday) while Friday is a busy day as we get China's monthly suite of activity data, its latest 1-yr MLF fixing rate and US industrial production and the University of Michigan survey. So a busy week.

There's no other place to start than US CPI. Our US economists have a preview piece here but to summarise, since gas prices have risen nearly 7% in August, headline CPI (+0.61% DB forecast vs. +0.17% previously) will see its largest monthly increase since June 2022. However, core (+0.22% vs. +0.16% last month) is likely to remain relatively becalmed. On these estimates, the year-on-year number for core CPI inflation should fall 0.4pp to 4.3%, whereas headline would rise 0.4pp to 3.7%, the highest for three months.

With core inflation still relatively subdued, our economists think the positive momentum should continue, with the three-month annualised rate falling by about 90bps to 2.2%, while the six-month annualised rate should fall by 50bps to 3.6%. In both cases that would be the lowest since early 2021. So for now the strong headline print should be offset by the positive news on core. However, the risk is always that the longer headline edges up, the more risk of second-round effects down the road. See the fuller preview of what to look for in all the components in the preview link above.

Talking of components, Thursday's PPI will be nearly as important, as many categories feed into the Fed’s favoured core PCE deflator. Health care is the main one and our economists are a little concerned that wage growth in the sector could push this higher in the months ahead after recent falls. Airlines are another one to watch. They’ve surprisingly slumped in CPI recently, but risen in the PPI. So this will be an interesting one to get resolved. As our economists highlight, airfares are one reason why the “core services excluding housing” PCE inflation has been significantly stronger than that of the CPI core services excluding rent and medical care services. The Fed pays far closer attention to the PCE core services ex-housing series because this accounts for a little over half of core PCE inflation.

On Thursday, August’s retail sales will be a very important release after the strong July reading, so it’ll give us a much better idea of consumption trends and the direction of travel for Q3 GDP and beyond. Our economists expect some payback across headline (-0.3% vs. +0.7% in July), sales excluding autos (+0.1% vs. +1.0%) and retail control (-0.2% vs. +1.0%). So don't underestimate how much a strong reading could impact the likelihood of another hike, or a bad reading impact the probabilities of a recession. The final highlight for the US will be the inflation expectations in the UoM sentiment survey. Will it edge up a bit with the recent rise in gas prices?

Over in Europe all eyes are on the ECB’s decision on Thursday. Our economists have nervously held their 3.75% terminal deposit rate call for many months now, and as such they think the ECB will stay on hold. However, even if they don't hike this week, don't expect any sign that the council are confident that this is the last hike. A lot of uncertainty remains over European inflation, whilst GDP has been in near-stagnation since last autumn. See our economists' preview note here. Elsewhere in Europe, we have the ZEW survey due for Germany tomorrow, as well as Eurozone-level industrial production on Wednesday.

Speaking of central banks, DB Research has just changed our call on the Bank of Japan’s monetary policy outlook (link here). Our economist now expects yield curve control to be removed in October (previously April 2024), and for negative interest rate policy to end in January 2024 (previously December 2024). In part, that follows the interview that BoJ Governor Ueda gave with the Yomiuri newspaper, where he said an end to negative interest rates was possible if they were confident that wages and prices were rising sustainably, and that they could have enough information on the wage outlook by the end of the year.

That’s already had a significant effect in markets, with the Japanese Yen jumping by +1.08% against the US Dollar this morning, whilst the TOPIX Banks index has surged by +4.22%. There’s also been a fresh rise in government bond yields, with the 10yr yield up +5.2bps to 0.70%, which is its highest level since 2014. And that’s also gone hand-in-hand with higher yields elsewhere, with the 10yr US Treasury yield up +3.0bps this morning to 4.29%.

Whilst bank stocks in Japan have done well, equities more broadly have struggled, with the Nikkei down -0.45% this morning. Elsewhere in Asia, the performance has been more mixed, with the Hang Seng (-1.68%) seeing a notable decline, whereas the CSI 300 (+0.31%), the Shanghai Comp (+0.57%), and the KOSPI (+0.26%) have posted advances. That also follows the news over the weekend that China’s CPI inflation was now positive again year-on-year, with a +0.1% reading in August, although producer prices were still down -3.0%. Looking forward, equity futures are also pointing higher in the US and Europe, with those on the S&P 500 up +0.16%.

Now recapping last week, it was a quiet week for data, but markets were slightly on the negative side. As an example, the S&P 500 index fell back -1.29% , whilst 10yr Treasuries sold off as yields rose +8.7bps.

With a slight bias towards better US data, the probability of a Fed hike priced in for November climbed by 10pp to 48%. Markets also moved to price 17.5bps fewer Fed cuts by end-24, with the 2yr Treasury yield rising by +11.2bps week-on-week as a result (+4.3bps on Friday). 10yr Treasury yields followed suit, gaining +8.7bps (+2.0bps on Friday).

Back in Europe, even as economic data proved weaker than expected last week, ECB commentary kept the prospect of another hike firmly on the table, leaving markets leaning in a hawkish direction. Pricing for a 25bps hike in September rose to 38% on Friday, up from 23% a week before (and 35% on Thursday). Against this backdrop, 10yr and 2yr bund yields rose +6.2bps and +9.1bps in weekly terms, respectively, (both down -0.3bps Friday). For the latter, this was the largest weekly rise since mid-June.

In the FX space, the bullish dollar narrative continued, with the dollar index registering its 8th weekly gain in a row, up +0.79%. Turning to commodities, oil moved higher again following further announcements of cuts to oil supply by OPEC+ earlier last week. WTI crude secured its second consecutive week of gains after gaining +2.29% week-on-week (and +0.74% on Friday) to $87.51/bbl. Brent was similarly up +2.13% (and +0.58% on Friday) to $90.44/bbl. Both reached their highest weekly close since November last year.

Off the back of this, US energy stocks outperformed, up +0.97% on Friday and +1.39% week-on-week, while the S&P 500 retreated -1.29% in weekly terms amidst the broader risk-off tone (+0.14% Friday). Tech was the main underperformer last week, with the NASDAQ down -1.93% in weekly terms (+0.09% on Friday). Apple was the main driver of this underperformance, falling -5.95% week-on-week despite a slight +0.35% recovery on Friday, following new stipulations on iPhone use by Chinese government workers. Over in Europe, even as data releases were worrisome, the STOXX 600’s weekly decline was smaller than in the US, down -0.76% (+0.22% on Friday).