Markets

•          Markets recently pondered the chances of the Fed restarting its easing cycle and tried to find out how fast this process toward a more neutral level of the policy rate might go. The question of resuming with rate cuts was already answered by Fed Chair Powell’s at Jackson Hole. Powell warned that the fragile balance of both weak demand and supply of labour contains the risk of a jump in the unemployment rate if corporates at some point were to start shedding jobs. If so the Fed could quickly shift to accelerated rate cuts at each of the three remaining meetings this year. Tomorrow’s US payrolls have a decisive say in this debate. A soft US manufacturing ISM on Monday (employment subindex at 43.9) and weaker than expected JOLTS job openings yesterday, were complemented today by sub-par ADP private job growth (54k vs 68k expected) and rising jobless claims (237k from 229k) providing ‘anecdotical evidence’ on a softening labour market. The US services ISM to be published later today adds a next piece to this puzzle. Markets now almost fully discount a 25 bps step at the September 17 Fed meeting and see the Fed returning to a neutral policy rate H2 2026 or early 2027. In case of an adverse labour market scenario, there is still plenty of room to frontload/accelerate this process. US yields today decline 1.5-2.5 bps across the curve. The US 2-y yield is testing the lowest level since early May when markets tried to assess the impact of the Liberation Day tariff announcements. EMU/German bonds slightly outperform Treasuries, with Bund yields declining between 1 bp (2-y) and 3.5 bps (30-y) in a corrective reversal on the fiscal-driven bear steepening earlier this week. In France, headlines referring to people familiar with the matter, suggest that President Macron will try to avoid new elections even in case the government of PM Bayrou would fall next week. The 10-y spread of French OAT’s over Bunds stabilizes /eases marginally (78 bps). UK yields in the meantime show a similar corrective bull flatting after the sell-off of LT gilts earlier this week, suggesting that fiscal related market tensions at least are not worsening.

•          Today’s bond market rebound fails to inspire any directional move in the major USD cross rates. DXY (98.28 from 98.15) still holds the extremely tight ST sideways range between 97.5 and 99. Similar narrative for EUR/USD (1.1645 within 1.1575/1743 ST range). Sterling gains marginally against the euro (EUR/GBP 0.877) as the focus on fiscal risk premia subsides a bit, for now. A still basically stagflationary narrative from the BoE DMP survey (cf infra) only illustrates a challenge context for BoE policy and thus for sterling.

•          The Bank of England’s monthly Decision Maker Panel survey of CFO’s (SME’s and large companies) showed expectations for year-ahead CPI inflation rising from 3.2% in July to 3.4% in August (single month). Expected year-ahead wage growth remained unchanged in August at 3.6% on a three-month moving-average basis. Realized annual employment growth was -0.5% in the three months to August. Expectations for employment growth over the next year have also weakened, falling by 0.3 percentage points to 0.2% in the three months to August. The DMP survey asked firms about the margins of adjustment to the changes in employer National insurance contributions (NICs) implemented in April 2025. Firms were allowed to select more than one option. 66% of firms reported lowering profit margins, 34% raising prices, 46% lowering employment and 20% paying lower wages than they otherwise would have done.

•          Czech inflation slowed as expected in August to 0.1% M/M with the annual figure converging towards the central bank’s 2% inflation target (2.5% from 2.7%). Core inflation, excluding energy, food, alcohol and tobacco prices, rose by 0.2% M/M to stabilize at 3.2% Y/Y. Details showed both energy (-0.4% M/M & -4.4% Y/Y from -4.6%) and food, alcohol and tobacco prices (-0.1% M/M & 4% Y/Y from 4.9%) contributing negatively in August. Czech goods prices fell as well last month (-0.2%) while rising by 1.1% compared with August of last year (from +1.4% Y/Y). Services price inflation remains stubbornly high at 0.5% M/M and 4.7% Y/Y (from 4.8%). The latter strengthens recent market thinking and CNB talk that the central bank won’t be in the position to lower its policy rate further than the current level (3.5%). Czech markets didn’t respond to the figures. EUR/CZK earlier this week tested the YtD low at 24.39.

Graphs

US 2-y yield: market positioning for softer labour market data, potentially opening the door for faster Fed easing. 

EUR/USD: going nowhere. Payrolls to unlock the stalemate?

EUR/CZK: In-line Czech CPI inflation suggests ongoing (real) interest rate support for the krone.  

Brent oil ($/bp): markets take cautious approach ahead of this weekend’s OPEC+ meeting

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