On Friday, EMU and US PMI’s illustrated the ‘mixed feelings’ that investors have to cope with these days. The reopening of the economy propelled the EMU Markit PMI to the strongest growth pace in 21 years (composite 60.6) with demand outpacing supply, solid hiring, and rising prices. However, companies are growing more cautious about the future. US PMI’s reinforced those mixed feelings. The manufacturing PMI hit a record 63.1 from 62.1, but the services measure eased substantially (64.6 to 59.8) amongst others due to labour shortages. European yields initially tried a cautious rebound, but the move lacked conviction. US PMI’s pushed core bond markets back to square one. US yields declined less than 1 bp, with the 10-y closing at 1.27%. A rise in inflation expectations was counterbalanced by a new drop-in real yields. German yields closed narrowly mixed with the 2-y easing 0.6 bp and the 30-y rising 0.8%. Despite the mixed bond market reaction, equities rebounded further. Earnings apparently were strong enough to give some comfort. Low yields were no obstacle. Three major US indices (Dow, S&P, and Nasdaq) touched new records. European equities gained 1.0%+. The CRB commodity index is nearing the post-pandemic top. Brent oil closed north of $74 p/b. The USD held strong, but with limited further gains (DXY close 92.915; EUR/USD 1.1771).
This morning, most Asian equity indices are ceding ground with China as a big underperformer (losses of 3%-4%). Stricter regulatory measures from Chinese authorities on (Education) Tech firms (cf infra) are causing selling pressure. Japan is the exception to the rule, (Nikkei +1%) but the country has some catching up to do after a long weekend end last week. The yuan weakens to USD/CNY 6.484. US yields are ceding a few bp. The dollar tentatively declines (USD/JPY 110.30, DXY 92.85, EUR/USD 1.1780) despite this broader risk-off.
Today, the calendar contains Ifo German business climate and the US New home sales. In line with the PMI’s, headline German Ifo business confidence is expected to improve further but markets will keep a close eye at expectations. The US Treasury will sell 2-y notes, with 5-y and 7-y sales planned tomorrow and on Thursday. Further out this week, the eco calendar is well filled with US durable goods orders and consumer confidence (Tuesday), the US Q2 GDP (Thursday) and EMU Q2 GDP, and preliminary July CPI on Friday. Last but not least, the Fed on Wednesday will conclude its policy meeting with a press conference of chair Powell. On the data, the market recently was much more sensitive to negative surprises rather than to positive ones. Despite a better sentiment end last week, this probably won’t change anytime soon. The Fed will leave its policy unchanged, but markets will be keen to hear the Fed’s view, both on the economy and on recent market moves. Quid with the debate on tapering of bond purchases? Recent US inflation and labor data were higher/stronger than expected, but can the Fed afford to start the long road to normalization at the time markets turn uncertain on the pace of the recovery? Despite a return of calm end last week, interest rate markets don’t prepare for big tightening anytime soon. The picture on LT US, and even more, European yield graphs stays fragile. First support in the 10-y German yield (-0.44%/-0.47% area) is much closer compared to the first resistance that needs to be regained to call off the alert (-0.30% area). In FX, the USD stays strong but is struggling to extend gains. DXY 93.20/44 marks the next USD resistance with 1.1750/04 being a comparable reference in the EUR/USD cross rate. Will a soft tone from Fed’s Powell on Wednesday further erode potential USD interest rate support?
China imposed a set of stricter rules on private education firms as appeared in a document that circulated on Friday. All Institutions providing schooling services will have to register as non-profit companies. No new licenses will be granted and foreign investment in the sector will be restricted. The measures are reported to aim to reduce financial pressures on families. The reform measures this morning trigger a sharp setback in shares of Chinese education tech firms which is hurting overall (regional) market sentiment.