HomeContributorsFundamental AnalysisStrong ISM Data Highlights Resilient US Economy

Strong ISM Data Highlights Resilient US Economy

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The most important data release today is the euro area wage figures (compensation per employee) for Q2 2023. This is ECBs favourite wage measure and today’s release is the last important data point before the ECB monetary policy meeting next Thursday.

Compensation per employee rose markedly in Q1 at 5.4% y/y, which was well above ECB Chief Economic Lane’s previous (rough) estimate of 3% being the level corresponding to the inflation target. We have already received Q2 wage figures from the euro area countries where wage growth slowed in France, Italy and Spain but increased in Germany compared to the first quarter. In the latest projection from June, the ECB expected compensation per employee to average 5.3 in 2023.

We also get the final euro area 2023 Q2 national account figures. GDP rose 0.3% q/q according to the first estimate and we expect the final data to confirm this. The final data will reveal a breakdown of the GDP figures, which will give interesting insights into the growth composition.

The 60 second overview

Stronger-than-expected ISM services for august reaffirmed the US outperformance narrative, adding broad support to the USD. US ISM services for August printed at 54.5, the highest reading since February with business activity, price pressures and employment growth picking up. Consensus was anticipating ISM Services to signal weakening growth, but the surprising pick-up was broad-based across different sub-indices, with both current and future activity indicators signalling accelerating growth. Markets reacted by sending 2-year US Treasury yield 4-5bp higher and US stocks lower. While we highlight the volatility in ISM figures, we note that it is a clear signal that the US is not on the brink of a recession at least for now.

Bank of Canada (BoC) left policy rates unchanged as widely expected at yesterday’s interim meeting. The BoC acknowledged that excess demand is easing but kept the open door for additional hikes if needed as it highlighted concerns of persistence in underlying inflation pressures. Overall, the communication was on the hawkish side with the BoC noting that there was “little recent downward momentum in underlying inflation” and that there is “risk that elevated inflation becomes entrenched”.

Overnight, Chinese trade data for August came in close to expectation. Exports came in at -8.8% y/y (cons: 9.0%, prior: -14.5%) and imports slightly better than expected -7.3% y/y (cons: 9.0%, prior: -12.5%), In China, focus remains on the property sector and the faltering recovery, and while the big property developer Country Garden has avoided a default for now, the property sector remains a key source of strain on the economy.

Equities: Global equities lower yesterday with Japanese stocks being the bright spot. We saw a very interesting sentiment shift at 16:00 CET when US Non-Manufacturing data came out much stronger than expected and was showing the opposite picture of service PMIs. Yields were clearly higher on the number and equities lower. The worst performing sectors were tech, growth, and long duration stocks while defensives, insurance, and energy outperformed. In US yesterday, Dow -0.6%, S&P500 -0.7%, Nasdaq -1.1% and Russell 2000 -0.3%. Asian markets are lower this morning and the same goes for futures in the US and Europe.

FI: European yields rose across the board, led by the front end. Shorter-dated EGB yields rose through the day driven by hawkish ECB comments in the morning and the move was accelerated by surprisingly strong US ISM services release in the afternoon. In the end, the front end led sell-off saw 2y Germany up by almost 9bp on the day to above 3%. Intra-euro area spreads were relatively stable yesterday. Markets added 2bp to the September pricing (to 9bp), but took out 6bp of rate cuts in 2024 (to -63bp).

FX: EUR/USD remained in the 1.0700-1.0750 range during yesterday’s session. Stronger-than-expected ISM services reaffirmed the US outperformance narrative, adding broad support to the USD. Despite the rise in Brent crude oil prices to levels above 90 USD/bbl NOK has done very little this week with EUR/NOK still trading around the 11.50 mark. EUR/GBP moved back closer to the 0.86 mark on dovish BoE remarks.

Credit: Risk-off hit markets on Wednesday, dragging down credits along with equities. Itrax Main widened 1.9bp to close at 71.8bp, while Itrax Xover widened 8.9bp to close at 402.2bp. Assa Abloy’s three tranche EUR benchmark deal hit primary markets on Wednesday, with the ‘A-‘ rated lock-maker ending up printing EUR1.8bn on very strong demand.

Danske Bank
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