The Eurozone economic sentiment indicator decreased modestly from 98.9 to 97.6 points in August. Both industry and manufacturing saw a deterioration in economic activity. At the same time, expectations of a recession in the economy lead to more moderate forecasts for higher inflation on the back of consumer spending in the coming months.

Economic sentiment in the Eurozone fell in August.

A recession is looming in the Eurozone and businesses are becoming increasingly pessimistic about how economic activity will develop further. Industrial output and services declined significantly in August, while leading indicators such as new orders are falling rapidly. Hiring rates have also slowed, which is also a clear sign of a slowdown in economic activity in the bloc. Although hiring expectations remain above the long-term trend, the economy will likely not be able to avoid a moderate recession this quarter.

Interestingly, producer and service price expectations have been declining for the fourth consecutive month in response to weakening demand, which may indeed indicate that inflation has peaked and will now decline due to the declining consumer demand. The big question is the impact of electricity and fuel prices on the margins of firms, which in turn could make core inflation more sustainable, as producers will be forced to compensate for the pressure by raising or holding prices.

The Fed continues to tighten monetary policy in order to ease consumer demand pressure on goods and services markets which in turn should affect inflation, pushing it to a comfortable 2% level. The reaction of the stock market to Powell’s speech at Jackson Hole was basically a surge in concerns that the signals of weakening growth in demand in the US economy and some slowdown in inflation will not be able to knock the Fed off course, which will continue to increase interest rates at quite a rapid pace. Following a 4% drop in major US equity indices, Neil Kashkari said he was pleased to see such a dynamic, hinting that the market decline would also dampen consumer demand through a welfare effect. This Fed stance suggests that markets should not hope for an easing of the pace of policy tightening, so the prospects for a new rally raise a big question, and if the upcoming earnings season won’t be as positive as expected, the bear market will most likely return. The main beneficiary of this situation is the dollar, so it is not worth shorting it now, the likelihood of a further rally is quite high. The Fed also doesn’t mind a strong dollar, as it helps fight import inflation, which is largely generated by high energy prices.

A strengthening dollar and equities downside due to rising yields in an alternative asset class – bonds – is only one side of the coin. The other side is the risks of a gas crisis in Europe and the depreciation of the yuan. The USDCNY topped 6.92 pointing to problems in the Chinese economy, despite the lack of a clear desire of PBOC to weaken the yuan.

The key reports on the economic calendar today will be the US consumer confidence report from the Conference Board and data on fuel prices in August. Against this background, the dollar index is likely to remain above the key short-term support zone (108.50):