NOK Jumps as Norway CPI Miss Fuels Rate-Peak Bets

Norway's krone jumped and short-dated bond yields fell Tuesday after July core inflation came in well below forecasts, raising the chance that Norges Bank's tightening cycle has already peaked.

Core inflation, which strips out volatile energy and food items, rose 2.7% year on year, the statistics office said. That undershot both the 2.9% consensus estimate and Norges Bank's own June forecast of 3.3%. The miss was driven by a smaller-than-expected rebound in information and communication technology prices and slightly lower food costs, analysts said.

Short-term Norwegian government bond yields dropped about 5 basis points after the print. The krone strengthened against both the euro and the dollar, recovering some of the ground lost in recent weeks as oil prices have climbed.

Markets now see a roughly 40% probability that Norges Bank will deliver one more 25-basis-point hike by year-end, down from about 60% before the data, according to swap pricing. The central bank meets Thursday and is widely expected to hold its benchmark rate at 4.25%.

"The inflation surprise shifts the risk balance toward a peak in the policy rate," said Marius Gonsholt Hov, senior economist at Handelsbanken in Oslo. "It makes a hike in September or December less likely, though the committee will want to see more data before declaring victory."

The Norwegian print was the standout data point in a quiet session for European markets. The August Sentix investor confidence index for the euro area rose for a fourth consecutive month, hitting 0.9 – the highest since the start of the Middle East conflict – from -3.1 in July. The improvement came from a sharp rise in the current conditions assessment, while expectations edged higher. Sentix said the reading suggests the recovery is continuing, though high energy costs and weak order books remain constraints.

Danish headline inflation slipped to 1.7% in July from 1.9% in June, below expectations for an unchanged reading. Base effects from food and energy prices pulled the headline lower, partly offset by seasonal increases for holiday accommodation and camping. Food prices rose 1.6% month on month, above the July average, suggesting the recent supermarket price war has slowed.

In currency markets, the yen was the biggest mover Tuesday, falling sharply against the dollar. USD/JPY rose above 159, undoing the effect of recent intervention efforts by the Bank of Japan and the Ministry of Finance. The catalyst appeared to be a combination of higher oil prices and rising U.S. interest rates – the two-year U.S. swap rate climbed back toward the level seen before the July payrolls report, traders said. EUR/USD edged slightly lower as broad dollar gains weighed.

Oil was the dominant macro variable across asset classes. Brent crude climbed to $87 a barrel as hopes faded for a near-term resolution to the U.S.-Iran conflict and the reopening of the Strait of Hormuz. Negotiations have stalled after President Trump's latest demands, which include compensation for those killed in wars and protests linked to Iran, officials said. The demands came in response to Iran's own conditions over the weekend.

The S&P 500 closed flat, while the Nasdaq fell 0.3%. The rotation was toward defensives. Energy stocks gained 4.6% in the U.S., benefiting from the oil move. Technology stocks fell 1.1%. Nvidia dropped after reports that the company is working on a $500 billion AI funding package. The stock is down 2.86% on the day, trading at $217.55. AlphaScala's proprietary model gives NVDA an Alpha Score of 76/100, rated "Strong." After the close, Asian equities were mostly in the green and U.S. futures pointed to a positive open.

Norges Bank's policy decision is due Thursday at 10 a.m. Oslo time.