Global investors expected that August numbers might hint at U.S. inflation having passed its peak, but higher than expected YoY and MoM prints for both headline and core CPI revealed a still increasing trend. This led to a hawkish shift in Fed rate tightening expectations. After the data release, the USD gained broadly after some retreat earlier in the week, global equity markets came under pressure and UST yields soared to multi-year highs, with the entire curve coming under flattening pressure amid reinvigorated concerns about a hard landing of the U.S./global economy. Economic bellwether commodities such as copper and other base metals have also started to flash caution signals on the outlook for the global economy. In this context, the 2Y UST yield seems to be a particularly important gauge to look at in the near future, being at the verge of breaking into 4% territory. In this highly fluid context, investors are now turning their attention to the FOMC meeting next week where a 75bps increased to the Fed Funds rate appears to be all but certain, while some are urging the Fed to deliver a bolder 100bps hike. However, better than expected readings on long-term inflation expectations in the preliminary University of Michigan survey of consumers for September, the last important release before next week’s FOMC, probably tilt the balance in favor of 75bps. Elsewhere, Chinese economic data came stronger than expected this week, indicating a degree of domestic economic resiliency despite ongoing challenges, but that is unlikely to alter the overall narrative of structurally weaker economic activity this year amid stop and go COVID policies and headwinds to the property sector. Also, notably, the USDCNH breached the symbolic 7.00 level for the first time in the post-pandemic era.

Frothy property markets are poised for double-digit price declines as consumers face mounting financial pressures. Around the world, soaring borrowing costs are squeezing homebuyers and property owners alike. From Sydney to Stockholm to Seattle, buyers are pulling back as central banks raise interest rates at the fastest pace in decades, sending house prices falling. Meanwhile, millions of people who borrowed cheaply to purchase homes during the pandemic boom face higher payments as loans reset. The rapid cooldown in real estate — a leading source of household wealth — threatens to worsen a global economic downturn. While the slump so far isn’t near the levels of the 2008 financial crisis, how the decline plays out is a key variable for central bankers who want to tamp down inflation without hurting consumer confidence and triggering a deep recession. Already, bubbly markets such as Australia and Canada are facing double-digit house-price declines, and economists believe the worldwide downswing is only getting started. Higher real estate financing costs hit economies in multiple ways. Households with loans tighten their belts, while rising mortgage payments discourage would-be buyers from entering the market, dragging on property prices and development. The slowdown is a stark turnaround from a boom fueled by central banks’ easy-money policies in the years after the financial crisis and then supercharged by a pandemic that sent people searching for bigger spaces and remote-work-friendly homes. Now, many people who paid record prices face loans due to reset higher just as soaring inflation and a potential recession hit. UK retail sales plunge, underlining risk of recession. British retail sales fell much more than expected in August, in another sign that the economy is sliding into recession as the cost-of-living crunch squeezes households' disposable spending.Retail sales volumes dropped by 1.6% in monthly terms in August, the Office for National Statistics said - the biggest fall since December 2021 and worse than all forecasts in a Reuters poll of economists that had pointed to a 0.5% fall. The data are likely to add to worries about the strength of demand in Britain's economy. UK fashion retailers Primark (ABF.L) and ASOS (ASOS.L) and online supermarket Ocado Retail (OCDO.L) have all warned about their profits this month. The pound slid further towards 1.14 USD on the back of the data.

The seizing of oil giant’s assets another sign of Berlin’s U-turn on policy with Moscow after invasion of Ukraine. The German government has taken control of three refineries owned by Russian oil company Rosneft, in an escalation of the energy war between Moscow and the west triggered by Russia’s invasion of Ukraine. Chancellor Olaf Scholz said his government had not taken the step lightly, but that “it was unavoidable”. “We have known for a long time that Russia is no longer a reliable energy supplier,” he said on Friday. “That’s why it’s important to do everything we can now to safeguard Germany’s energy supply.” The move is part of efforts by the government to protect the German economy from the effects of an EU-wide embargo on Russian crude, which comes into effect on January 1 and is designed to deprive Russian president Vladimir Putin of revenues to fund the Ukraine war. The move secures the future of PCK, a refinery owned by Rosneft in the north-eastern German town of Schwedt, which was expected to be hard hit by the looming oil embargo. PCK sits atop the Druzhba pipeline, which carries crude about 4,000km from central Russia directly to Schwedt. Efforts by authorities to secure alternative supplies of oil for the refinery had been complicated by the fact that Rosneft is its majority owner, controlling 54% of its shares. Rosneft accounts for about 12% of Germany’s oil refining capacity, making it one of the largest oil processing companies in the country.  The move on Rosneft’s assets was seen as likely after Germany amended a key energy law in August allowing the government to place companies with “infrastructure critical to Germany’s security of supply” under temporary trusteeship. The law stipulated that as a last resort, the government could even expropriate such companies. The move on Rosneft is the latest in a string of measures by the German government to deal with the chaos caused by Russia’s war in Ukraine, which has driven European gas and electricity prices to record levels. Germany has accused the Kremlin of “weaponising” its energy exports to Europe by throttling the flow of gas through the Nord Stream 1 pipeline between Russia and Germany.

Russian President Vladimir Putin said he’s “not in a hurry” to end military operations in Ukraine and threatened to step up attacks on civilian targets. The leaders of China and India both expressed concern about the war to Putin. President Joe Biden warned Putin in a “60 Minutes” interview against using nuclear or chemical weapons in Ukraine.  President Volodymyr Zelenskiy welcomed an upcoming visit by United Nations investigators to mass burial sites discovered in one of Ukraine’s newly-liberated eastern regions. US Secretary of State Antony Blinken said Russia had committed war crimes following the discovery of the graves and evidence of torture at the Izyum site. Another Ukrainian wheat cargo has sailed for Ethiopia under a UN humanitarian program, as Putin renewed his threat to torpedo a safe-transit agreement reached in July for Ukraine’s Black Sea grain exports.

Sergio Massa held a variety of high-level meetings during his trip to the U.S., most notably with IMF Managing Director, Kristalina Georgieva, United States Secretary of the Treasury, Janet Yellen, and the Inter-American Development Bank (IADB), where he confirmed financing of roughly 5 billion USD between now and next year. The IMF’s press release on the meetings emphasized the Fund’s support of Argentina’s progress in critical areas of an updated macroeconomic framework, policies needed to meet fiscal targets, and associated reserve accumulation. A staff-level agreement on the next review is anticipated in the coming days. Massa’s U.S. tour reflects his strong ties in Washington and recognition of his ability to execute on policy domestically as a pragmatic and veteran politician, which is vital to stabilizing the fragile macroeconomic backdrop. Improved relations with the IADB as well as the resumption of Paris Club negotiations are welcomed after uncertainty in the aftermath of Guzman’s departure. Massa’s comments at various events emphasized their commitment to the 2.5% of GDP 2022 primary deficit target, shoring-up FX reserves, and growth engines of the economy including energy, knowledge, mining, agriculture, and tourism. The gap between the parallel and official FX rates has fallen meaningfully with Massa at the helm to just under 100% from 165% in mid-July, demonstrating the improvement in sentiment and pressing imbalances. We expect imminent staff level approval of the second review as guided by the IMF with board approval to follow shortly, resulting in a disbursement of just under 4 billion USD.