ECB Meeting, US Inflation Data in Focus

CURRENCY FUTURES

The USD index continued lower following the weak nonfarm payrolls data, which showed hiring stalled in August, reinforcing expectations that the Fed will cut rates in September. Given the very weak figures, rate cuts from the Fed after the September meeting seem likely, as the bank will need to move to cut rates in order to maintain employment in the country. Previous revisions to the data showed job growth in June and July combined was 21,000 lower than previously reported, highlighting the cooling labor market. Investors look ahead to PPI inflation and CPI inflation data later this week for further clues to the near-term rate outlook; if inflation proves to be mild, markets could increase speculation about the amount of easing from the Fed and see the dollar lose further ground.

Euro futures are higher ahead of the European Central Bank’s policy meeting on Thursday, where the bank is expected to leave rates steady. German industrial production grew in July despite a drop in exports to the US. Industrial production grew 1.3% on the month, the first rise since March, while June’s data was revised upward to a decline of just 0.1% from the 1.9% slump originally reported. However, it is possible that tariff front-running contributed to the uptick in activity in July, as it was the last month where the 10% baseline tariff was in effect, before the 15% tariff took effect in August. Fresh data also shows that exports to the US from Germany fell 7.9% in July, the fourth consecutive month of declines, reaching the lowest level since late 2021. Exports overall fell 0.6%, with additional declines to both China and the UK. In France, Prime Minister Francois Bayrou faces a confidence vote on Monday, which he is widely expected to lose—potentially forcing President Emmanuel Macron to appoint a fifth prime minister in less than two years. On the central bank front, the European Central Bank is expected to leave interest rates on hold this month and offer little guidance for clues on future moves out of the bank. ECB policymakers have recently said the bank is in a good place and well positioned for any economy moves after it achieved its target of reaching 2% inflation earlier in the summer. Eurozone GDP grew just 0.1% in Q2, slowing from 0.6% in Q1, largely due to a 0.3% contraction in Germany amid US tariffs. The data, alongside rising inflation and falling unemployment, supports expectations that the ECB will hold rates steady.

British pound futures gained against the dollar to start the week, continuing its advance over the dollar after the sterling gained around 0.5% following the weak payrolls data in the US. Gross domestic product data out of the UK for the month of July will be the main focus of the week ahead of the Bank of England’s policy meeting next week. A solid GDP reading would add to expectations that the central bank will leave rates on hold, while a weak reading could add to some bets of a rate cut. Money markets are showing a slim chance of even one rate cut out of the bank this year, given inflation in the UK remains well above the bank’s 2% target and the economy has fared relatively well without any signs of a serious weakening. Governor Andrew Bailey told MPs there is “considerably more doubt” about the timing of UK rate cuts. The economy expanded 0.4% in June, and economists are expecting Friday’s figures to show no growth with a reading of 0.0%. Markets will also be watching industrial production and trade data for July, also released on Friday.

Japanese yen futures are lower, pressured by policy uncertainty after Japanese Prime Minister Shigeru Ishiba resigned on Sunday. Ishiba instructed his party to hold an emergency leadership race, saying he would also continue his duties until a successor is elected. Concern over the uncertainty prompted a sell-off in the yen and its government bonds. Investors are focusing on the chance of Ishiba being replaced by an advocate of looser fiscal and monetary policy. On the data front, revised government data showed that GDP grew more than initially measured in the second quarter, with the economy growing 0.5%, a step above the initial 0.3% reading. Private consumption increased 0.4% from the previous quarter, compared with a 0.2% rise in the preliminary reading, while capital expenditure growth was revised to 0.6%, compared with the initial estimate of 1.3%. Markets will continue to monitor the Japanese economy for signs of growth in domestic demand for clues as to when the Bank of Japan will resume its interest rate hike cycle again. The Ministry of Finance is scheduled to auction 2.4 trillion yen worth of five-year Japanese government bonds on Wednesday, as well as sell six-month Treasury discount bills on Tuesday and three-month bills on Friday.

Australian dollar futures are higher as the prospect of lower US interest rates offered support for the Aussie in what is a relatively quiet week for the Aussie in terms of economic data. Interest rate cut bets for the Reserve Bank of Australia were scaled back last week when GDP figures showed the economy grew 0.6% during the second quarter. Annual growth came in at 1.8%, beating expectations of 1.6% growth. Domestic demand was the main driver of growth, led by household and government spending. Household spending grew 0.9% in Q2. The increase in household spending could put pressure on prices and limit the number of future rate cuts from the RBA. Money markets are now pricing an 80% chance of a rate cut in November, down from 100% before the data was published. Building approvals in the country shrank 8.2% in July, coming in line with expectations, while private house approvals grew 1.1%.

STOCK INDEX FUTURES

Stock index futures are higher as markets look ahead to inflation data out this week for more clues on the US economy following a weak nonfarm payrolls report on Friday. Payrolls rose by just 22,000, well below expectations of 75,000, while the unemployment rate was little changed, ticking higher to 4.3%, showing a substantial slowdown in job growth. Slowing price growth could add to expectations for a series of interest rate cuts from the Fed if inflation proves to be a lesser problem than initially feared, while a stronger reading could temper expectations for the amount of easing this year. Apart from PPI data out Wednesday, weekly initial claims and CPI data out Thursday, the economic calendar is relatively light in the US. Markets are fully priced in for a September rate cut.

INTEREST RATE MARKET FUTURES

Futures are little changed across the curve, apart from the 30-year bond, where the yield fell. The Bureau of Labor Statistics will revise earlier months’ jobs data on Tuesday, which will likely be more closely watched than usual following the weak payrolls data on Friday that cemented expectations for a rate cut in September and has fueled speculation for a series of rate cuts. Payrolls rose by just 22,000 in August, far below the 75,000 forecast, signaling a cooling labor market. Markets will closely monitor PPI inflation data out Wednesday and CPI inflation data out Thursday for possible clues on how many rate cuts the economy could see from the Fed this year. Recent PPI data has shown that pipeline inflationary pressures have been building due to tariffs, with July’s reading showing producer prices grew 0.9% in July, while services prices rose by 1.1%. The uptick in inflation has worried economists that inflation could continue to grow into the fall, although it remains to be seen whether or not tariff-induced price inflation will be more of a one-time increase or a consistent increase in prices.

The federal government led job losses, shedding 15,000 positions and down 97,000 since January. Manufacturing declined by 12,000 jobs, with transportation equipment down 15,000 due to strike activity, while wholesale trade also fell by 12,000. Revisions to prior months resulted in a net loss of 21,000 jobs. Despite steady layoffs (1.1%) and hiring (3.3%), job openings dipped to 7.2 million, suggesting a gradual slowdown.

The US Treasury market is experiencing a unique supply/demand dynamic shift. Recent government debt auctions have shown a changing profile of who is purchasing government bonds, with demand from traditional investors like central banks and pension funds waning and unlikely to come back. Instead, short-term investors such as money market funds have picked up supply. The new mix of investors is likely to lead to a more volatile market for longer-dated debt, as short-term investors will be more price sensitive than traditional investors, like pension funds, who tended to hold onto their bond investments. Demand from pension funds has dwindled in recent years due to funds switching from defined-benefit schemes, which provide a guaranteed income at retirement, to defined-contribution schemes, which depend on investment performance. Defined-benefit schemes use government bonds, while defined-contribution schemes favor equities. These developments also come at a time when central banks are selling their holdings of government debt (quantitative easing), and governments are increasing spending, driving up bond issuance. This has resulted in investors demanding more term premium on longer-dated debt, while shorter-term debt has remained closer to current interest rate levels, steepening the yield curve. In response, governments have increased short-term debt issuance in order to avoid steeper borrowing costs, which has the potential to reduce liquidity in longer-dated bonds and make them more volatile. The Treasury will auction $58 billion in three-year notes on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday. Markets will be eyeing the composition of the auction share for further clues on investor demand.

The spread between the two- and 10-year yields fell to 57.3 bps from 59.5 bps on Friday.

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