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Sunset Market Commentary


The preliminary August PMI’s showed business activity in EMU contracting at accelerating pace. The composite output declined from 48.6 to 47. After 14 consecutive sub 50 readings for the manufacturing sector (43.7 from 42.7), negative growth spread to the services sector (from 50.9 in July to 48.3, the lowest level in 30 months). Both manufacturing and the services reported falling output and orders, with the goods producing sector still recording the shaper rates of decline. The backlog of work declined in both sectors. According S&P/HCOB “hiring came close to stalling as companies grew more reluctant to expand capacity in the face of deteriorating demand and gloomier prospects for the year ahead’. Despite the contraction in activity, prices remain cause of concern. Inflationary pressures are weaker than seen on average during the previous two years, but average selling prices and input costs again accelerated in August. Especially the rise in the rate of input cost inflation caught the eye as a fall in manufacturers’ costs was counterbalanced by an upturn in input costs from the services sector, mainly attributed to rising wage pressures. On a country level, Germany registered the steepest decline (composite 44.7 from 48.5). The rate of contraction in France was unchanged at 46.6 after the steep drop last month. The rest of Europe recorded a more moderate decline in output. According the analysis of HCOB, July and August PMI’s point at a 0.2% GDP contraction in Q3. The sharp decline in EMU activity both hammered EMU yields and the single currency. German yields currently decline between 8 bps (2 & 30-y) and 10 bps (5-10y) (before the release of the US PMI’s). Markets understandably see the weaker activity as potentially triggering a pause in the ECB hiking cycle at the September meeting. However, higher wages still at risk of sustaining an upward wage price spiral, suggest quite a tense internal debate within the ECB. The poor EMU performance pushed EUR/USD below the 1.0834 support. However, the decline slowed in US dealings (currently 1.0825). EUR/GBP briefly tested the 0.85 area post the EMU PMI’s, but the negative surprise in the UK PMI (see below) was at least as big as in EMU, questioning the BoE’s anti-inflationary commitment. The UK 2-y yield currently declines 15 bps+. EUR/GBP rebounded to the 0.856 area. The recessionary narrative also blocked a modest further rise in European equities (Eurostoxx 50 -0.2%). US indices open marginally stronger (S&P 500 +0.3%).

US PMI’s are published as we finish this report. They also show a further deceleration in activity. However, the composite index at 50.4 (from 52.0) stays in positive territory. Both manufacturing (47.0) and services (51.0) fell more than expected. In a first reaction US yields fully catch up with the decline in EMU rates. The belly of the curve outperforms (5-y -13 bps). The dollar returns part of its intraday outperformance with the DXY index dropping from near 104 to 103.75.

News & Views:

The UK composite PMI crashed in August from 50.8 to 47.9 (vs 50.4 expected). It’s a return to bust-territory (< 50) following a spell from August 2022 until January 2023. Details showed a similar deterioration in both manufacturing (42.5 from 45.3 vs 45 expected) and services (48.7 from 51.5 vs 51 expected). S&P Global Market Intelligence, responsible for the release, said that details suggest that inflation should moderate further in the months ahead, but also indicate that the fight against inflation is carrying a heavy cost in terms of heightened recession risks. July and August PMI’s combined hint at a 0.2% Q/Q GDP contraction in Q3. Companies are reporting reduced orders for goods and services as demand is increasingly hit by the cost-of-loving crisis, higher interest rates, export losses and concerns about the economic outlook while a further pull-back in hiring indicates that the labour market is losing steam.

The Indian government is expected to impose a ban on sugar exports for the fiscal year 2023-2024 according to a Reuters report. It would be the first such restriction in seven years. A concerning dearth of rainfall has adversely impacted cane yields. The decision could put additional pressure on sugar prices. The UN Food and Agricultural World Sugar price index reached its highest level since 2011 as recently as May this year.

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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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