Fri, Jun 02, 2023 @ 14:57 GMT
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Sunset Market Commentary


All eyes were on PMI business confidence for May today. In a context where concerns about growth going forward rise by the day, they provide much-appreciated guidance. For Europe, the fall-out of the war, high inflation and general uncertainty remains contained. The composite PMI eased from 55.8 to 54.9. Underneath though, the sectoral divergence gets increasingly apparent. While the manufacturing gauge held up well (from 55.4 to 54.4), the figure was boosted by lengthening supplier deliveries amid material shortages, supply chain disruptions and the raging war. Output barely recovered from a near-stagnant 50.7 in April to 51.2 and new orders declined for the first time since June 2020. Services sector activity on the other hand came in at a still-solid 56.3. It is continues enjoying the effects from Covid measures having ended. Services companies are hiring like there’s no tomorrow to handle strong order inflow and get rid of backlogs. On a darker note though, the general private sector outlook (12m ahead), edged to the lowest since 1.5 years. In both sectors, prices charged rose at the second-fastest pace ever. Input price pressures, while still high, eased further, providing a bit of hope for prices being at or near the peak. On financial markets, the euro was the biggest beneficiary of today’s PMI outcome. EUR/USD was already rising towards the 1.07 big figure going into the release after ECB president Lagarde in Davos reiterated intentions to start raising policy rates in July and shelve negative rates in September. The PMIs provided the final push beyond 1.07. Core bond yields were much less impressed, perhaps weighed down by the negative risk sentiment and some nuances by Lagarde and Villeroy. Lagarde said the ECB is in no rush to hike and said a 50 bps move is not the consensus at this point. Her comments were later repeated by Villeroy but countered by Austria’s Holzmann. German yields changes vary from -3 bps (5y) to -0.5 bps (30y). The 10y struggles to keep the symbolic 1%. USTs outperform with yields losing between 5.9 and 8.4 bps across the curve. UK Gilts were the absolute outperformer though. The front end tanks more than 13 bps following the publication of PMI’s (see headline below). They came days after UK retail sales last Friday soothed some market concerns about inflation-squeezed British consumers. The poor reading refuels the debate, both within markets and within the Bank of England, on how far the current hiking cycle can/will go. Sterling gets a beating. EUR/GPB surges beyond 0.85 to 0.857 currently. Cable (GBP/USD) aborts the test of 1.26 abruptly to change hands at 1.2485.News Headlines

UK private sector growth slowed to the weakest since the winter of 2021 as the cost living crisis heavily weighs on consumer demand, PMIs showed today. The composite index sharply declined to 51.8 from 58.2. The decline was mainly due to a sharp setback in services activity (51.8 from 58.9). The manufacturing PMI fell from 55.8 to 54.8. However, output in the sector also slowed to 51.8. Private sector orders slowed for the third consecutive month. Employment growth remains robust, but some business are starting to reduce costs by not replacing voluntary leavers. Input costs hit a survey record, driven by the service sector. Business expectations also eased to the lowest level in two years. The prospect of an accelerated slowdown despite persistent high cost growth trigged a sharp decline in UK yields with the 2-y easing about 13 bps as the BoE struggles to find a balance. Sterling declined sharply both against the euro and the dollar (cf supra).

Czech May confidence data today showed a divergent picture between consumers and businesses. Business confidence improved further from 103.8 to 107, the highest level since 2008! The improvement was mainly due to more favorable developments in industry and trade. Services confidence stabilized while sentiment in construction declined. Consumer confidence meanwhile declined further from 81.3 to 75.8, the lowest level since 2012. Compared to the previous month, the number of respondents worrying about their own financial and overall economic situation and rising unemployment increased. The Czech koruna shivered immediately after the release but currently trades little changed near EUR/CZK 24.64.

KBC Bank
KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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