5 key questions for the week ahead

After a febrile week for bond markets, traders will be watching for a key US inflation report to either calm or further fray the nerves, while Treasury auctions are going to be a test of demand. The week kicks off with the Labor Day holiday, meaning US markets are shut on Monday. The European Central Bank is poised to raise rates for a second time this cycle, but the question is what happens after. Meanwhile investors get a glimpse of the latest product range from Apple, including its first foldable iPhone.

Here’s the key things to watch over the next week.

Will US inflation support a rate hike by the Fed?

Key US inflation data is the biggest test for the bond market after a fractious start to September as yields on government debt soared to multi-year highs. The CPI data, which is due out on Friday, is the last piece of the puzzle for the Federal Reserve ahead of its September 15/16 meeting. Bond markets were under pressure after Kevin Warsh, the Fed chair, seemed to offer a hawkish read on the path of inflation in his remarks at Jackson Hole. However, influential Fed governor Chris Waller later suggested he would support holding rates steady this month if the data indicates inflation still trending towards target. The reaction function remains muddy and the data has not given a clear enough read.

After reaching a four-year high of 4.2% in May, CPI inflation had fallen to 3.4% by July, rising 0.1% on the month. Core CPI, which strips out food and energy, rose 0.2% MoM and 2.5% year-on-year. The relative cooling in the level kept markets believing the Fed will stay on hold. Since then however we have seen some more persistent signs of inflation. PCE inflation is at +3.7% for the year, while Core PCE posted +0.2% MoM and +3.3% YoY last month. Core PCE was 3.0% using a three-month annualised rate and so-called ‘supercore’ services was unchanged, at 3.8% YoY, which points to persistently sticky service-sector inflation. A hot jobs report on Friday cemented the view that the Fed doesn’t need to worry about the labour market and that it remains short the inflation side of its mandate. After the jobs data Trump demanded the Fed to cut rates or he'll end trade with countries with which the US maintains trade deficits. Even if inflation is hotter than expected, would Warsh dare consider hiking against the will of the President?

At its July meeting the FOMC voted 9-3 to leave rates on hold, with the dissenters favouring a hike. The August inflation reading will decide the next move. As Waller put it, “Recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting. But [...] if the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.”

Based on comments from Waller and NY Fed president John Williams, it appears that the balance lies around the monthly core reading sitting at +0.2% (hold) and +0.3% (hike). Cleveland Fed nowcast modelling indicates it’s holding at +0.2% in August and September (core) and +0.4% after rounding for the headline CPI rate. 

What does the ECB signal after hiking rates?

The European Central Bank is all but certain to raise rates for a second time this cycle when it meets in Frankfurt on Thursday. Apart from some members calling for a hike at the last meeting, the Eurozone economy has proved remarkably resilient in the face of the US-Iran war and energy price shock. Moreover, inflation has inched higher and is likely to remain above 3% for the rest of the year. 

The question for the market will be whether the ECB says it’s done for this hiking cycle or leaves open the door for a further increase. For now it looks like the current inflation surge is contained to energy, which would suggest it can rest on this second hike this year as its insurance policy. Taking the benchmark rate to 2.5% would still be considered policy-neutral. To hike further would take the policy rate into restrictive territory and it’s unclear why this would currently be necessary – the economy is resilient, not blisteringly hot. The other question relates to how the ECB views the recent rise in bond yields. Whilst it has done some of the job for the ECB in tightening financial conditions – and supports the case for this hike to ‘second and done’ for now, it poses questions about debt sustainability for heavily-indebted Euro area members, particularly France. The ECB may start to worry again about spreads and there is the potential for volatility ahead of the French presidential elections next year. If the hiking is over for now then the debate could swiftly move onto whether questions about debt sustainability would mean the ECB is willing to restart asset purchases. That may be for another day but fits with a broader theme we see emerging; financial repression across developed markets as fiscal deficits and debt servicing costs rise with ageing populations and increased military budgets in an increasingly dangerous world, which brings us nicely onto the third question for the week ahead:

How will bond markets handle upcoming Treasury auctions and buybacks?

After the global bond rout sent yields on longer-dated bonds to multi-year/decade highs there is a fresh test of investor appetite government debt with US 10yr and 30yr Treasury auctions this week. How these auctions get off will be an important signal for risk assets. Market participants will pay a lot of attention to the tails and the bid/cover ratio for the strength of demand. A strong 30yr auction for Japanese government bonds helped to soothe market jitters on Thursday, amid signs that the country’s massive pension funds are shifting from overseas bonds to domestic debt.

The upcoming auctions for US bonds come as the Treasury’s increased bond buyback begins on Wednesday, a move that has been a focal point for investors amid the turmoil in bond markets. If we see further pressure on longer duration bonds Treasury might be tempted to signal expanding the buybacks further, which will either calm the markets or signal panic. It’s possible the US Treasury Secretary, Scott Bessent, will feel the need to deliver a Draghi moment and say they’ll do whatever it takes to suppress yields.

Will Trump do a TACO before the mid-terms?

Recent re-escalation in the Middle East sent oil prices to six-week high as crude had its best week since July, pushing a key commodity index to a record high. The US and Iran exchanged fresh rounds of military strikes in recent days, reigniting what had become something of a frozen conflict after a period of relative calm. The pressure is now on Trump ahead of mid-term elections, with Republicans uneasy about the path the conflict is taking; the US again mired in a Middle East entanglement with apparently no sign of a way out. Trump is due to speak at the party’s mid-term convention in Dallas on Thursday.

How will Apple’s first foldable iPhone land as new CEO John Ternus makes his debut?

It’s Apple’s main event of the year on Wednesday with the company set to launch a number of new products, including the highly anticipated iPhone Ultra, its first foldable device. New CEO John Ternus teased the “huge launch”, which will be his first major event after taking over the leadership of the Cupertino from Tim Cook on 1 September. Investors will be paying close attention with the foldable iPhone seen as a premium model that can drive higher average selling prices and improved margins. Nikkei reports that early production of the new phone has been limited to just a few hundred a day due to quality control issues. Apple is also expected to debut two new iPhone 18 models as well new Apple Watch and AirPods models. Company news is sparse but Oracle and Adobe report earnings, hot on the heels of bumper numbers from the likes of Salesforce, Snowflake and the broad recovery across the software trade.