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Macro Wrap

The key member of the US Fed policy making committee Governor Christopher Waller said his September rate decision will be "heavily influenced" by August CPI data due 11 September. He signalled willingness to hold rates steady if disinflation continues, prompting markets to price roughly even odds of a hike at the September meeting, down from near-certainty earlier in the week. The comments pushed the probability of a 25bp September hike down to around 51% from 63% a day earlier and 70% earlier this week. The OIS market is pricing in a total hike of 38p by year-end and 58bp by July 2027.

The other major market move was the sharp appreciation in the Japanese yen. USD-JPY fell around 300 pips to below 156, as expectations shifted towards a potentially faster pace of Bank of Japan (BoJ) tightening beyond an already largely priced September hike. BoJ board member Hajime Takata on Wednesday reinforced speculation that BoJ could tighten more aggressively than previously expected. He said a 25-basis-point hike “is not necessarily set in stone,” and that back-to-back rate hikes would be a possibility.

US trade deficit widens sharply: The July goods and services trade gap expanded 24.4% month-on-month to $88.6 billion, the largest since early 2025, driven by an 11.4% surge in capital goods imports — primarily computers and semiconductors — reflecting the AI investment race.

August ISM services index rose to 55.4 (Bloomberg consensus: 54.1) vs 54.1 previously. It was the strongest level in six months. The prices-paid component rose to 72.6 from 70.3 previously, its highest since August 2022, suggesting that inflation pressures are not confined to the goods sector. The new orders component rose to 60.9 from 57.2 previously. The employment component was just modestly higher at 47.8 from 47.4 previously.

The DJIA, S&P500, and Nasdaq Composite Index rose 1.2%, 1.1% and 1.4% respectively. The Euro Stoxx 50 gained 0.3%. The Dollar Index fell around 0.7% to 98.91, while EUR-USD rose 40 pips to 1.1630. The US 2Y Treasury yield fell 3bp to 4.34%, while the 10Y and 30Y yields both dipped 1bp to 4.77% and 5.25% respectively. The German 10Y Bund yield eased 3bp to 3.34%. The UK 10Y yield fell 10bp to 5.13% and partly reversed the sharp 16bp jump on Tuesday. Brent crude oil prices dipped 0.1% to USD95.52, while gold rose 2.1% to USD4,473, supported by the weaker USD and lower US yields.

Data watch: we get non-farm payrolls for August. The market consensus is 50k vs 30k previously. The unemployment rate is expected to be unchanged at 4.1% and average hourly earnings at 3.1% yoy.