Today’s European PMIs suggest the economy is already stalling in September after a short revival during the Summer. The EMU composite indicator declined from 51.9 to 50.1. The manufacturing index showed solid growth in the sector (53.7 vs. 51.7 in August). Germany is leading the rise, surging from 52.2 to 56.6 as new (export) orders increased significantly. In France, the rebound remains far more limited (50.9 from 49.8). Services however came in unexpectedly weak: from 50.5 to 47.6. A rising tally of coronavirus cases across Europe forced many governments to reinstate social distancing measures, hurting the services sector once again. The EMU series were dragged down by a decline back into contraction territory, both in France (47.5) and Germany (49.1). Inflow of new business was limited (Germany) or even negative (France). The labour market remains the weak link in both sectors, but especially in manufacturing. Companies hesitate to hire amid fears of a new prolonged period of lockdowns. IHS Markit’s chief economist warned the economy could topple in a recession again after a brief rebound in Q3. Markets ignored this doom and gloom completely though. European stocks instead focus on Wall Street’s decent performance yesterday and rise about 1.5%. The PMIs only triggered a brief moment of hesitation before equity markets resumed their intraday uptrend. Core bond yields also dipped temporarily after the release. Vice Fed chair Clarida further elaborated on Evan’s slip of the tongue yesterday, clarifying he expects rates to remain near zero at least until inflation hits 2%. Both the US and the German yield curve eventually trade unchanged. Peripheral spread changes range from -1bps (Spain, Italy) to -4 bps (Greece). Italy’s 30y yield (1.769%) even touched a new record low.

Moves in the (dollar) FX markets were limited. EUR/USD tested important support in the high 1.16 area this morning. It tried to shrug off this early weakness, even as the PMIs provided little reason to do so. The couple briefly surpassed 1.17 but that didn’t last very long. At 1.1688 the currency pair is currently still considered to be in the technical danger zone. The trade-weighted dollar (DXY) escaped the sideways trading range through the upper bound and confirms this technical break today. DXY is changing hands at 94.12. USD/JPY holds north of 105. UK September PMIs eased compared to last month but remain solid. The data were close to consensus with the manufacturing reading at 54.3 (from 55.2) and the services series at 55.1 from a stellar 58.8 in August, leading to a composite index of 55.7 (vs. 59.1 last month). The outcome was a stark contrast with Europe and triggered an intraday turnaround in EUR/GBP. The pair initially traded above 0.92 but is currently filling bids in the 0.917 area. PM Johnson announcing a “massive package” to stimulate jobs and growth also helped the British currency today. The current job-preserving but costly government scheme ends by October 31 and that’s triggering some unease among sterling investors.

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News Headlines

ECB governing council member Stournaras warned in an opinion piece in German newspaper Handelblatt that prematurely phasing out policy support measures could delay the recovery by generating a cliff effect: a sharp rise in insolvencies and bankruptcies, an increase in non-performing loans and in structural unemployment. These factors would in turn trigger sustained deflationary pressures and a situation of secular stagnation.

The International Labour Organization estimates that income earned from work worldwide dropped by 10.7% or $3.5tn in the first nine months of the year compared to the same period in 2019. The figure excludes government compensations.


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