Weekly house view | Detroit on strike ?

After a difficult time for risk assets last week, markets will be looking for direction this week from US inflation data and the European Central Bank’s policy meeting. They will also watch to see whether the United Auto Workers union can secure substantial pay rises with the “Big Three” US auto makers by end-Thursday, having threatened to strike if it does not. On the August US consumer price inflation data, the consensus expectation is for a further decline in the core measure from 4.7% to 4.3% year-on-year but a pick-up in headline inflation to 3.6% on unfavourable energy base effects. Upside risks to inflation may return as expectations are low and energy prices rising. A Wall Street Journal report that a shift is underway in Federal Reserve officials’ rate stance strengthens our view that the Fed hiking cycle is done, but also raises the risks of complacency if inflation surprises to the upside. Last week, most stocks indices and bonds ended down on the week. If US Treasuries were to post a third consecutive negative annual return in 2023, that would be a first in US history. An increasingly important factor has been the strength in the USD as the US economy remains more resilient than others. A senior Japanese official said authorities would not rule out any option to clamp down on "speculative" currency moves, and Bank of Japan Governor Kazuo Ueda said the BOJ could have enough data by year-end to determine whether it can end negative rates. Last week saw bumper issuance of debt by high-grade companies. We prefer investment grade over high yield debt. At the micro level, markets will watch a big tech product release this week.

We expect the ECB to raise interest rates one last time to 4% but it is a very close call. Since the beginning of this tightening cycle, the ECB has argued the risk of doing too little has been higher than the risk of doing too much. This should remain a guiding principle going into Thursday’s meeting. However, if the ECB does not hike this week, the case for additional tightening will likely weaken further in coming months.

In China, exports and imports both fell by less than expected in August. It looks like domestic demand has troughed. We continue to believe some of the pessimism about China is overdone as policy measures will help stabilise the property sector and the economy. Oil rose again on the week and while US strategic reserves remained near a 40-year low, there is no change to the supply picture and we remain moderately bullish. Finally, severe flooding in Greece again highlighted the impact of climate change.