Oil and rates surging ahead of US CPI today

In focus today

• In the US, all eyes will be on the August CPI this afternoon. This will be the last inflation indicator before the September Fed meeting. Last week Fed’s Waller (permanent voter) said that if August inflation data shows continued progress, he is inclined to hold rates steady. If inflation came in hot, he would consider a September rate hike. We forecast headline inflation at 0.4% m/m SA and 3.4% y/y (prior: 3.4% y/y), while we expect core inflation at 0.2% m/m SA and 2.4% y/y (prior: 2.5% y/y), both in line with consensus.
• In the UK, the monthly GDP figure for July is released today, together with manufacturing and industrial production data. The June reading showed solid GDP growth of 0.3% m/m. Recent data has been resilient enough for the Bank of England to conclude that the economy is in better shape than feared. Manufacturing and industrial production were both negative in June, suggesting some softening in the goods sector. PMI picked up surprisingly in July and climbed into expansionary territory. The rebound held in August, supporting the view of more solid growth in the UK.

Economic and market news

What happened overnight

In commodities, brent jumped to USD 108/bbl last night and held that level overnight. This is adding renewed inflation pressure and feeding through into global rates markets. Markets are starting to realise that the Strait of Hormuz disruptions are not going away anytime soon, especially from recent comments that signal no clear resolution in sight. Yesterday, Iran-backed Houthi rebels’ seizure of Mocha on Yemen’s Red Sea coast brings them closer to the Bab al-Mandeb Strait, a critical passage for seaborne energy flows. With the group already targeting Saudi assets and shipping, markets are pricing a higher risk of disruption to exports and tanker traffic.

What happened yesterday

In the euro area, the ECB hiked policy rates by 25bp, bringing the deposit rate to 2.5%, in line with consensus and market pricing. The communication at the meeting, including the new projections, came as a very hawkish surprise to markets. The ECB revealed a firm focus on energy prices in its reaction function, so we now expect the ECB to hike in both October and December, bringing the deposit rate to 3.00%. Markets are pricing in an even longer hiking cycle, with a total of 3-4 more hikes over the coming year. Read more in ECB Review – A “no-brainer” hike and more to follow, 10 September.

In the US, the PPI report was mixed ahead of next week’s FOMC meeting. Headline PPI came in higher than expected, with energy prices rising as anticipated, while core PPI increased less than expected. Broader service price pressures moderated after last month’s uptick, although core goods were slightly firmer. The volatile trade and transportation services components rose notably, likely reflecting pass-through from higher fuel prices into transportation costs. As an example, airfares (which feed directly into the Fed’s preferred PCE measure of inflation), rose 4.1% m/m. Overall, the report sends a mixed inflation signal, but markets have taken it in a hawkish direction, pushing rates higher and contributing to a lower EUR/USD.

In Norway, core inflation rose to 3.0% y/y in August close to our expectation of 3.1% (Cons.: 3.0% Prior: 2.7%). This is well below Norges Bank’s estimate from the June MPR at 3.3%. In isolation, this suggests a lower rate path, moving from signalling around 1.5 further hikes to roughly 0.5 hike. Other factors are mixed: growth is weaker and NOK is stronger, but global rate expectations are higher. Overall, the September rate decision looks like a close call. Unless the regional survey on 17 September surprises to the upside, market pricing ahead of the meeting may be decisive. The probability of a September hike fell on this datapoint.

In Sweden, the July GDP indicator was weak at 2.5% y/y and -0.8% m/m, although June was revised higher, while production looked somewhat better at 3.6% y/y driven by stronger services. The domestic economy still appears stronger than the GDP print suggests, with solid services activity, high retail sales and weekly consumption data pointing to growth, while manufacturing and construction remain volatile. The figure was closer to the Riksbank’s June forecast, which may worry the doves on the Riksbank’s board, but with a weak SEK, high oil prices and rate spread versus the ECB, it should not materially affect the September rate decision. We still expect clear guidance for a hike this year, and we believe the hike will take place in November.

In Denmark, the CPI data for August showed 2.0% headline inflation, below our expectation of 2.2%. This is up from July, where inflation was 1.7%. Overall, August inflation rose mainly because of higher petrol, diesel and gas prices as well as higher electricity prices. Food prices continued to fall, and we do not see signs that the higher energy prices are driving prices up elsewhere in the consumer basket.

In Finland, we revised our 2027 GDP forecast further up to 2.1% (from 1.4%), reflecting the expected positive growth impact from Google’s EUR13bn investment announcement made on Wednesday. This follows another positive revision we announced just a week ago in the Nordic Outlook – New sources of growth, 3 September. Even if the exact timeline of the growth impact remains uncertain, and even though the project increases electricity demand significantly at a time when the risk of energy shortages is rising globally, we are optimistic that the Finnish growth backdrop has improved on a broad basis during 2026.

Equities: A remarkably contained equity response. Equities fell yesterday but given the relatively hawkish ECB message and the sharp moves at both the front and long end of the yield curve, the selloff could easily have been much more severe. The only reason global equities declined by merely around 0.5% was the exceptional strength of the underlying economy.

The session had two dominant drivers: the ECB communication and another 6% rise in oil prices to the highest level since mid-May. The two are difficult to separate, as the ECB message was itself a direct consequence of the oil shock. Investor behaviour and sector rotations therefore largely reflected the same underlying driver.

Crucially, investors are not pricing a full stagflation shock. Had they been, we would have seen much stronger performance from energy and materials, as well as a considerably deeper defensive rotation. Instead, defensives only marginally outperformed cyclicals, while the broader drawdown remained contained despite the two major shocks. Asian equities are lower this morning, but both European and US futures are marginally in the green.

FI and FX: Yields have moved sharply higher following the ECB, which was more hawkish than expected, in combination with a rise in oil prices, with the front Brent contract now above USD 108 per bbl. The 10Y UST is now only a few bp below the 5.00% mark, as the US Treasury buyback operation fell short of expectations. Following the lower-than-expected Norwegian inflation print yesterday, we now expect Norges Bank to stay on hold in September. Despite the sharply higher oil price, EUR/NOK climbed higher towards 10.80 and the recent NOK rally increasing looks exhausted. The combination of a rising oil price and a hawkish ECB was in combination clearly negative for the SEK, with EUR/SEK rising from 11.16 towards 11.26.