Hesitancy still was the underling feeling on global markets in the second half of this week, even as the heat of Monday’s and Tuesday’s ‘growth panic’ subsided. Economic data, even those that are supposed to be the most forward looking, are put in question as a viable precursor on the path of the economy later this year. This was also the fate of today’s EMU PMI’s. The July EMU IHS market Flash composite PMI printed at a 21 year high (60.6 from 59.5) as the restrictions are eased and the economy reopens. The manufacturing index eased slightly to 62.6 from 63.4. The services measure hit a 15-year peak rising from 58.3 to 60.4. Demand and orders remain strong both in services and manufacturing but are facing unprecedented capacity constraints even as firms step up hiring. Selling prices also continue to rise at a near record pace. So, for now apparently only good news about the EMU recovery. There is a ‘but’. Markit reports that expectations for the output in the year ahead slipped from a June peak back to the level of February. The delta variant not only poses a risk for demand, it might further disrupt global supply chains. This only illustrates recent market unease and explains the limited market reaction to a historic strong EMU PMI. The German yield curve steepens modestly with the 2-y easing 0.5 bp while longer yields are rising 1-2 bp (10 & 30y). Even this rise is more a catch up move with yesterday’s late session US rebound rather than a reaction to the PMI’s. At -0.41%, the German 10-y yield is still within reach of recent lows. Non-core EMU bonds stay well bid with 10-y spreads vs Germany easing up to 2/3 bp for the likes of Italy, Spain or Greece. Reuters reports that ‘sources’ close to the ECB indicated that a decision on the future of the PEPP program even isn’t likely at the September ECB meeting. US curve moves are immaterial after reversing earlier gains at longer maturities up to 1.5/2 bp (10 &30-y) following a soft US (services) PMI. Solid corporate earnings and, maybe recent easing in financing conditions, are giving renewed comfort to equity investors. European indices are gaining about 1%. For the Nasdaq and the S&P, even the all-time record levels are again within reach. This also applies for the CRB commodity index.
The improved risk sentiment for now doesn’t hurt the dollar much. The DXY trade-weighted index is trading little changed at 92.85. USD/JPY is extending gains north of 110 (110.40). EUR/USD hardly profits from the strong EMU PMI. At 1.177, the 1.1750 support area still is at risk. Sterling maintains most of yesterday’s gain against the euro (EUR/GBP 0.855) even as the UK PMI eased substantially more than expected (composite 57.7 from 62.2).
The Russian central bank came and hiked big: it raised its key policy rate with 100bps to 6.5%, extending a tightening cycle that started in March (+25bps) and continued in April and June (both 50bps). The central bank is struggling to contain inflation (expectations) with core measures reaching 6.6% in June, well above the 4% target and the Bank of Russia’s own forecasts. The bank estimates the neutral rate at 5-6%, meaning the policy stance is now tight. The Bank of Russia “will consider the necessity of further key rate increases at its upcoming meetings”, suggesting the cycle may still not be over as “risks remain significantly pro-inflationary”. New average rate forecasts in any case were lifted to 5.7% for 2021 and 6.5% for 2022. Growth and inflation for this year were also boosted to 4-4.5% (vs. 3-4%) and 5.7-6.2% (vs. 4.7-5.2%). Inflation is expected to ease towards target not before the end of 2022 (4-4.5%). The Russian rubble strengthened only slightly to USD/RUB 73.6 as the big move was by and large expected.
Not everyone agreed on the ECB’s new guidance, Lagarde admitted yesterday. Today it became clear that apart from Germany, Belgium also objected. NBB chair Wunsch together with Weidmann is concerned that the current wording is seen as making too much of a long-term commitment to loose policy according to people familiar. Looking at market expectations, Wunsch said, “we’re maybe talking about 5 to 6 years […] before we would hike”, adding that he “didn’t feel comfortable taking a commitment for such a long period”.