Take Two: Eurozone inflation edges up; bond yields rise

What do you need to know?

Eurozone annual inflation edged up to 2.1% in August from 2% in July, according to a flash estimate -marking the first time it has overshot the European Central Bank’s (ECB) 2% target since April. Food, alcohol and tobacco are expected to have been the main contributors to the rise. Core inflation, which excludes more volatile food, energy, alcohol and tobacco prices, remained unchanged at 2.3%. Despite the rise in headline inflation, the ECB is expected to leave rates on hold this week. After July’s meeting ECB President Christine Lagarde said the central bank was “in this wait-and-watch situation” and any future decision will be “decided on the basis of data”.

Around the world

Fixed income markets felt the strain last week as a deluge of post-summer issuance combined with sticky inflation and weak demand for long-dated bonds conspired to send yields higher. The yield on 30-year US Treasuries rose to 5% at one point, while UK long-term borrowing costs rose to their highest since 1998 and in Japan 30-year bond yields reached record levels. Bond markets subsequently rallied after weak US jobs data raised expectations the Federal Reserve could cut interest rates, which also helped equity markets higher, with the S&P 500 hitting a new high. Elsewhere, gold - traditionally seen as a ‘safe haven’ asset during periods of market volatility - hit a new high.

Figure in focus: 54.6

US business activity continued to expand in August, albeit at a slower pace, as an uplift in demand was weighed down by concerns over tariffs and the uncertain business environment, the latest Purchasing Managers’ Index (PMI) showed. The composite PMI, which includes services and manufacturing, edged down to 54.6 from July’s 55.1. A reading above 50 indicates expansion. Elsewhere, the Eurozone composite PMI saw a slight increase from 50.9 in July to a 12-month high of 51.0. In Japan, business activity expanded at a faster pace in August; its composite PMI increased to 52.0 from 51.6.

Words of wisdom

La Niña: A naturally occurring climate pattern in the tropical Pacific Ocean that refers to the cooling phase of sea temperatures; its counterpart is El Niño, the warming phase. The World Meteorological Organization (WMO) said while La Niña may return to impact weather and climate patterns from September onwards, despite its cooling influence, temperatures are still expected to be above average for much of the world. WMO Secretary-General Celeste Saulo said seasonal forecasts for El Niño and La Niña are an important climate intelligence tool and “translate into millions of dollars of economic savings for key sectors like agriculture, energy, health and transport”. 

What’s coming up?

On Monday, Japan releases its final estimate for second quarter economic growth – a preliminary estimate suggested annualised growth of 1%. In addition, China publishes export and import numbers and follows up with inflation data for August on Wednesday. On Thursday, attention will shift to Europe, as the ECB meets to decide on monetary policy; at its last meeting it kept its main deposit rate at 2%. Thursday also sees the US publish its latest inflation update; in July its annual rate came in at 2.7%, matching June’s pace. The UK updates markets with monthly GDP growth data on Friday.