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[Quick Facts]

1. Traders lift bets on ECB rate hike on worries about inflation over 3%.

2. U.K. GDP unexpectedly slips, increasing the likelihood of a pause in rate hikes after September.

3. Japan's corporate goods price index rises.

4. U.S. firms' Q2 earnings reports show spending will continue to grow moderately.

5. The U.S. Congress launches an impeachment inquiry against Biden.

6. Summers says the Fed may need to raise interest rates further.

7. Kazuo Ueda hints at an end to negative rates.

8. Stubborn inflation creates space for a Fed rate hike.

[News Details]

Traders lift bets on ECB rate hike on worries about inflation over 3%

Traders have increased bets that the European Central Bank (ECB) will raise interest rates by 25 basis points as Europe faces growing concerns about persistently high inflation. Money markets now show a 70% chance that the central bank will raise rates on Thursday, compared to a 20% chance earlier this month.

This follows reports that the ECB expected to keep inflation expectations above 3% next year, strengthening the case for further policy tightening. That spurred front-end pricing after markets became quite complacent about not raising rates. It's a very close call between a rate hike and a pause, but they ultimately expect the ECB to raise rates.

U.K. GDP unexpectedly slips, increasing the likelihood of a pause in rate hikes after September

U.K. GDP recorded a monthly rate of -0.5% in July, below market expectations. The decline was driven by the services sector. The Office for National Statistics noted that the biggest drag on services output came from the health sector. The information and communications sector also contributed to the downturn. In some ways, the data could have a great impact on upcoming Monetary Policy Committee decisions. And while data showed further deterioration in the labor market, wage growth rate remained disturbingly high. Today's data increases the likelihood of a pause in rate hikes at future meetings.

Japan's corporate goods price index rises

Preliminary statistics released by the Bank of Japan on September 13 showed that the corporate goods price index was 119.6 in August, up 3.2% year-on-year, mainly driven by the depreciation of the yen, cost increases, and other factors.

It increased by 0.3% month-on-month, mainly driven by petroleum products such as gasoline and diesel fuel due to weaker energy subsidies from the government.

The corporate goods price index reflects the price level of goods traded between companies and is one of the important indicators to measure the inflation level in Japan.

U.S. firms' Q2 earnings reports show spending will continue to grow moderately

Three key conclusions can be drawn from the second-quarter earnings reports of U.S. firms: weaker headwinds on bank credit availability; easing labor shortages and wage growth pressure; and rising consumer spending in the second and third quarters, with lower-income consumers standing out.

Consumption growth is expected to slow temporarily in the fourth quarter as the resumption of student loan payments puts pressure on the upcoming retail sales report. Company management is well aware of this headwind as discussion on the topic quadrupled during the current quarter. Nonetheless, retailer guidance suggests continued moderate growth in both overall and lower-end spending.

The U.S. Congress launches an impeachment inquiry against Biden

Speaker of the U.S. House of Representatives Kevin McCarthy announced the start of an impeachment inquiry against U.S. President Joe Biden on Tuesday, local time. On the same day, the three Republican committee chairs appointed by McCarthy to oversee the impeachment inquiry said they supported an investigation of Biden based on the evidence available.

McCarthy said House Republicans found that Biden's behavior is suspected of "abuse of power, obstruction and corruption" in the investigation of Biden's son Hunter Biden's overseas transactions. The House of Representatives will proceed with the impeachment inquiry.

McCarthy did not confirm a specific timetable for the impeachment or whether there would be a vote on the impeachment.

McCarthy once said that the impeachment inquiry allows Congress to use its highest legal authority, with greater subpoena power, to pursue any messages that need to be sorted out.

Republicans have conceded that an impeachment inquiry is "unlikely" to result in Biden's removal from office, especially when Democrats control the Senate. But it could be the tool they need to find evidence. It is also uncertain whether there will be enough 218 votes to pass a resolution to impeach Biden.

Summers says the Fed may need to raise interest rates further

Do not be too optimistic that the U.S. will be able to keep inflation in check without a recession, said former U.S. Treasury Secretary Lawrence Summers in a speech yesterday. He expected inflation to be a little stronger and the Fed may need to raise interest rates further.

Summers warned against assuming that the Fed will start cutting rates as soon as inflation falls.

Kazuo Ueda hints at an end to negative rates

The Bank of Japan will be "patient" to maintain the ultra-loose policy, BOJ Governor Kazuo Ueda said in an exclusive interview with the Japanese media Yomiuri Shimbun, but once the central bank is convinced that inflation will continue to rise along with rising wages, "the end of negative interest rates" is a viable option.

Kazuo Ueda also revealed a key timing signal: "We have not yet reached the stage where we can make a clear decision, and the central bank is likely to get enough information and data by the end of the year to determine whether wages will continue to rise."

Kazuo Ueda's statement suggests that the Bank of Japan has started the "countdown" to exit negative interest rates, but the Bank of Japan will remain cautious, specifically focusing on the ability to achieve a positive wage-price spiral and to seek a "quiet exit" from monetary easing.

Stubborn inflation creates space for a Fed rate hike

U.S. headline CPI growth rebounded for the second consecutive month in August by 3.7% on a year-on-year basis and posted the largest month-on-month increase in 14 months by 0.6%. Core CPI growth continued to slow to 4.3% year-on-year, but the year-on-year rate accelerated for the first time in six months to 0.3%, underscoring price pressures. Currently, the market does not expect the Fed to raise interest rates in September, but the likelihood of another rate hike in the coming months remains high.

Gasoline prices rose 10.5% MoM, becoming a key driver of the CPI rebound.

Core CPI cooling may reduce the Fed's pressure to a certain extent, but the sharp fluctuations in oil prices are likely to make Europe and the United States keep interest rates high for a longer period of time, and the Fed is still likely to increase rates in the fourth quarter of this year. At the same time, the re-acceleration of the core CPI may force the Fed to hike interest rates further, which may lead to an economic downturn.

[Focus of the Day]

UTC+8 20:15 The European Central Bank announces its interest rate decision

UTC+8 20:30 U.S. Weekly Initial Jobless Claims

UTC+8 20:30 U.S. PPI (Aug)

UTC+8 20:30 U.S. Retail Sales MoM (Aug)

UTC+8 20:45 European Central Bank President Christine Lagarde holds a monetary policy press conference