Euro area inflation at 10-year high

Confusion reigns in the markets: stocks are up in Asia despite fairly negative news on activity. Indeed, the China’s Caixin manufacturing PMI fell below 50 in August, as it was the case in many other countries of the region. But, as usual, this is fuelling expectations of monetary policy easing in China.

Yesterday’s news flow was quite negative, leading to both a surge in bond yields and a contraction in equities. Eurozone inflation hit a 10-year high of 3% in August, encouraging hawks at the ECB to call for a rapid reduction in securities purchases. The ECB meets next week. The majority of its members continue to believe that inflation will fall back below the 2% target in 2022 and that caution is needed, but there is no doubt that the major central banks will soon start to reduce their liquidity injections, which is making the market nervous.

In the US, house prices are soaring at almost +20% yoy while consumer confidence is falling sharply due to both the pandemic and price pressures. No worries about employment, however.

Today is another busy day with the manufacturing PMIs (watch out for a nasty surprise in the ISM!) and the ADP figures on private employment in the US. Probably speeches mostly in favour of rapid monetary tightening at the Bundesbank Symposium and overall quite high volatility. The EUR/USD exchange rate returned to 1.18, torn between the inflation figures in the Eurozone and concerns about growth linked to the Delta variant.