Market movers today
Today we get preliminary August flash PMI’s for France, Germany and the total euro area, as well as for the UK and the US. In July, manufacturing PMIs were very weak in the euro area and service PMIs were declining, which is a major argument for those arguing against further rate hikes from the ECB. In the US, data for August so far has been very mixed and today’s release should create some clarity on the direction of the US economy after what looks to have been a fairly strong July.
We also get euro area consumer confidence and US new home sales in July. The latter follows existing home sales out yesterday showing a 2.2% monthly decline.
The 60 second overview
Japan recovery: The Japanese economy has continued on a fairly strong note in August with the service sector re-accelerating as service PMI increased to 54.3 from 53.8 in July. This blows some new life into the reflation narrative in Japan after disappointing private spending in Q2. Indices for output prices in both service and manufacturing edged slightly lower but both remain around 54, also indicating sustained inflationary pressures. The manufacturing sector remains somewhat sheltered from the global manufacturing recession as the weak yen supports the exports sector. Manufacturing PMI remains below the 50 threshold but edged slightly higher to 49.7 in August.
US: The 10y UST yield continues to trade above 4.30%, supported by persistently upbeat US macro data, which the Richmond Fed’s Barkin described as ‘impressive’ in his comments yesterday. Notably, the latest uptick does not reflect significantly higher implied probability of the Fed delivering another rate hike, but rather longer-dated real yields rising further, which could imply markets turning increasingly bullish on the US economy not just in the near-term, but also for the coming years. In H1, growth in investments into public infrastructure and private high-tech manufacturing boosted GDP above expectations, fuelled by the fiscal stimulus measures seen in 2021-2022. And while we still remain sceptical of the current soft landing optimism, yesterday we published a paper in which we discuss the potential implications of a prolonged boom in investments and rise in productivity. Read more from Research US – Could investment boom pave the way for a soft landing? 22 August
Equities: Global equities higher yesterday, despite US dragging down in a still very selective and not top-down driven rotation. Consumer cyclicals, utilities and materials outperforming at the same day is not a very common combination and highlights the lack of strong macro drivers. That is up for a change in the coming days with much more heavy weight macro data and monetary policy focus on the agenda. In US yesterday, Dow -0.5%, S&P500 -0.3%, Nasdaq +0.1% and Russell 2000 -0.3%. Asian markets are rather directionless this morning with less China related news and Japanese flash PMIs coming in very close to expectation and very close to last month’s reading. Futures at both sides of the Atlantic are a tad higher this morning.
FI: There was again a rebound in European government bond yields as 10Y German government bond yields declined some 5bp yesterday and the EGB curves bull flattened from the long end. Short-dated US Treasury yields rose 4bp, while 30Y yields declined 4bp.
FX: EUR/USD headed lower yesterday, currently around 1.0850, as European yields dropped whereas US counterparts remained more or less unchanged. Mostly quiet trading on the day, but Scandies and especially the SEK strengthened early in the session and managed to keep their gains even though risk sentiment turned somewhat towards the close.
Credit: Performance of credit indices was solid with iTraxx Xover tightening almost 7bp and Main 1.7bp following a streak of seven consecutive days of widening. Primary market activity remained mostly confined to issuance from banks though E.ON priced a dual-tranche EUR transaction (both in green format).