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The final estimates of business activity in the euro region were weaker than expected and indicated a further business activity drop. The composite index fell to 48.1 in September from 48.9 a month earlier. Values below 50 indicate the eurozone has slipped from slowing growth to contracting economies after April’s growth peaks.

This indicator is good at predicting Eurozone economic cycles, which is why markets often react to its publication. Today EURUSD has come under pressure and is losing almost 1% since the first publication of the final PMIs that were first published for the individual major economies.

A sharp slowdown in business activity could call into question the ECB’s resolve to fight inflation as quickly as possible. In addition, the release of an unexpectedly weaker German trade surplus for August is working against today’s single currency. It is also prompting a reassessment of speculations about capital inflows into the region.

The bad news came just when EURUSD was one step away from testing its 50-day moving average, which has often acted as a resistance line to the downtrend of the last 15 months.

Markets

The bond-equity short-squeeze/risk rally from yesterday and Monday petered out in Europe this morning as markets reassessed chances of major central banks nearing the end of their tightening cycle. Today’s ‘hawkish’ 50 bps RBNZ hike for sure wasn’t the main driver. Bond yields in New Zealand even eased further after the RBNZ policy decision. At the same, time RBNZ even pondering a 75 bps rate hike illustrated that central bankers still have divergent views on what path they have to walk to bring inflation sustainably back to target. Yesterday, yields already rebounded off intraday lows and this move continued today. The US ADP labour market report was the next data set potentially guiding the debate whether Fed tightening is gradually cooling US excess aggregate demand. However, the 208k September private job growth was very close to expectations. A 53k upward revision for last month’s figure suggests that a slowdown in hiring, if any is developing at a very gradual pace. The US August trade deficit at $67.4 bln was also exactly in line with market expectations. Admittedly, the data release with most market potential, the US non-manufacturing ISM, still has to be published after finishing this report. In what probably should be characterized as a technical rebound, US yields are rising between 6 bps (2-y) and 10 bps (10-y). EMU swap yields in a similar move gain between 5 bps (2-y) and 10 bps (10-y). On intra-EMU bond markets, the Italian 10-y spread versus Germany widened 12 bps. Maybe some investors expected some news on QT from today’s ECB non-monetary policy meeting. PEPP reinvestment data published today also showed that net purchases of Italian bond were slightly negative during the August 22/September 22 period (-1.243 mln). The rebound in core yields also blocked this week’s impressive equity rebound. The EuroStoxx50 is ceding 1.15%. US indices opened with a similar loss. For now, the sell-on upticks dynamics apparently hasn’t halted yet. Oil extends its rebound with Brent trading at $93 p/b as markets await the outcome of the OPEC+ meeting in Vienna. The group is reported to discuss a big 2 mln p/b production cut. For now there is no formal decision yet. The EU also agreed on sanctions including an price cap for Russian oil to be transported to third countries.

On FX markets, the dollar show the logical comeback in line with core yields as the risk rally is running into resistance. DXY regains the 111 handle. EUR/USD yesterday evening and early this morning almost touched parity but in a gradually but protracted move currently already returned below the 0.99 big figure. USD/JPY is still locked in a very narrow short-term trading range (144.5). Sterling weakens further even as UK yields rise more than their EMU counterparts. UK PM Liz Truss at the Conservative party conference confirmed the government’s aim to maintain a growth supportive policy. EUR/GBP extends gains beyond the 0.8721 previous top (currently 0.874).

News Headlines

EC President von der Leyen welcomed Member States’ agreement on the 8th sanctions package against Russia. “We have moved quickly and decisively. We will never accept Putin’s sham referenda nor any kind of annexation in Ukraine. We are determined to continue making the Kremlin pay.” The new package prohibits maritime transport of Russian oil to third countries above an oil price cap. Bans on goods including steel products and providing IT, engineering and legal services to Russian entities will be extended. There are also restrictions on Russian access to aviation items, electronic components and specific chemical substances.

The World Trade Organization (WTO) updated its April forecasts. World trade is expected to lose momentum in H2 2022 and remain subdued in 2023 as multiple shocks weigh on the global economy. The WTO now predicts global merchandise trade volumes will grow by 3.5% in 2022 (from 3% in April). For 2023they foresee a 1.0% increase (from 3.4%). World GDP at market exchange rates will increase by 2.8% in 2022 and by 2.3% in 2023 (from 3.2%). Trade and output will be weighed down by several related shocks, including the war in Ukraine, high energy prices, inflation, and monetary tightening.

US ISM Services PMI dropped slightly from 56.9 to 56.7 in September, above expectation of 56.0. Looking at some details, business activity/production dropped from 60.9 to 59.1. New orders dropped from 61.8 to 60.6. Employment rose from 50.2 to 53.0. Prices dropped from 71.5 to 68.7.

ISM said: "The services sector had a slight pullback in growth for the month of September due to decreases in business activity and new orders. Employment improved and supplier deliveries slowed at a slightly slower rate.

"Based on comments from Business Survey Committee respondents, there have been improvements regarding supply chain efficiency, operating capacity and materials availability; however, performance remains less than ideal. Employment continued to improve despite the restricted labor market."

Full release here.

In the last couple of days, the Euro has been drifting higher, back towards parity. It comes at a somewhat curious juncture, considering the context in the UK. Though, it should be pointed out that yesterday markets jumped higher on expectations that the Fed would pivot sooner than previously expected.

This isn't an unusual phenomenon for the markets, to get a dose of optimism after trending downward for over a month. US stocks hit a new low for the year, and bounced back. The dollar weakness would naturally help the Euro. But there's more going on here.

Not all spending is the same

Last week, the pound took a dive after the Chancellor announced plans for a fuel price cap that could cost up to £200B, and tax incentives that would potentially reduce the UK's tax revenue by £45B. This sent shockwaves through the market, affecting even the rate decision by the RBA, citing turmoil in the UK as one of the reasons for its surprise move to raise rates lower than anticipated.

Yet at the end of the week, Germany announced an energy price cap in the order of €200B, while the EU struggles to deal with surging prices. Yet there was no proportional reaction in the markets. Germany reaffirmed its commitment to the debt brake, suggesting possible austerity measures next year. In fact, the Euro got stronger, and there was no hint that the ECB would have to step in.

Germany can spend more

The debt-to-GDP ratio is an important aspect in how inflationary government spending is likely to be. Germany has a ratio just below the Maastricht guidelines of 59.8% (that's before the pandemic). The UK was much higher at 85.4%. This puts a limit on how high the central bank can raise rates without the cost to service the government's debt significantly impacting the budget. Thus, traders aren't as worried about German government spending.

The issue for the Euro, however, is the latest round of negotiations about expanding the capacity of other countries to maintain debt. Most EU countries are not only far from complying with Maastricht rules, but some are also over twice the allowed debt-to-GDP rate, such as Italy. When taken together, the Eurozone’s debt-to-GDP is higher than the UK's.

The future trends

While the ECB maintains a lower interest rate than the BOE, the debt issue isn't as noticeable. However, there are several indicators that rates will continue to rise, potentially more than in the UK. Inflation is still on the rise, the ECB is worried about "de-anchoring" expectations, and the Euro Zone's GDP grew by a healthy 4.1% last quarter, giving the central bank more headroom.

In other words, depending on how the economy evolves, the Euro is not immune from a market reaction similar to what happened to the cable. Probably not in the near term. But, if through the winter the economic situation worsens, governments could seek to increase spending to support consumers and businesses.

The EU likely won't have the same chaotic announcement with lack of details that drove a sudden drop in confidence, such as what happened in the UK. In other words, the move might not be as sudden, but it could be as large, and require intervention from the ECB.

Daily Pivots: (S1) 144.06; (P) 144.67; (R1) 145.17; More...

USD/JPY is staying in consolidation from 145.89 and intraday bias remains neutral. Further rally is expected as long as 139.37 resistance turned support holds. Break of 145.89 will target 147.68 long term resistance. On the downside, however, decisive break of 139.37 will confirm short term topping. Deeper decline would be seen back towards 130.38 support.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high). For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Daily Pivots: (S1) 0.9741; (P) 0.9842; (R1) 0.9898; More...

USD/CHF is still bounded in consolidation from 0.9964 and intraday bias remains neutral. Outlook is unchanged that further rally is in favor as long as 0.9694 support holds. On the upside, above 0.9964 will resume the rally from 0.9369 to retest 1.0063 high. On the downside, however, break of 0.9694 support will extend the corrective pattern from 1.0063 with another falling leg, towards 0.9478 support first.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Daily Pivots: (S1) 1.1159; (P) 1.1247; (R1) 1.1408; More...

Intraday bias in GBP/USD is turned neutral with current retreat. On the downside, break of 1.1023 minor support will indicate that rebound from 1.0351 is over. Intraday bias will be back on the downside for retesting 1.0351. On the upside, firm break of 61.8% retracement of 1.2292 to 1.0351 at 1.1551 will pave the way to 1.2292 resistance.

In the bigger picture, fall from 1.4248 (2018 high) is resuming long term down trend from 2.1161 (2007 high). Next target is 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532. There is no scope of a medium term rebound as long as 1.1759 support turned resistance holds.

Daily Pivots: (S1) 0.9862; (P) 0.9930; (R1) 1.0055; More...

Intraday bias in EUR/USD is turned neutral first with current retreat. On the downside, break of 0.9734 minor support will suggest rejection by 55 day EMA (now at 1.0022), and medium term falling channel. Bias will be turned back to the downside for retesting 0.9534 low and then resume down trend. Nevertheless, considering bullish convergence condition in daily MACD, sustained break of 55 day EMA (now at 1.0022) will raise the chance of medium term bottoming at 0.9534. Further rally should then be seen to 38.2% retracement of 1.1494 to 0.9534 at 1.0283.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

This week's rebound in global stock markets is losing momentum, as major European indexes and US futures are trading lower. Dollar recovers and lead Yen and Swiss Franc higher. Meanwhile, the rebound in Sterling also appears to have exhausted. Aussie and Loonie are following the Pound and next weakest while Kiwi is supported by RBNZ rate hike earlier today. Also, it looks like Euro has failed parity against Dollar for now.

Technically, it's way to early to call for a trend reversal in stocks. For example, while DOW's rebound was impressive, it's kept well below 55 day EMA. Indeed, psychologically, if DOW couldn't firmly grip 30k handle for the rest of the week, the stage would be set for down trend resumption through 28715.85 low later in the month. Let's see.

In Europe, at the time of writing, FTSE is down -0.74%. DAX is down -0.95%. CAC is down -0.65%. Germany 10-year yield rose 0.081 to 1.953. Earlier in Asia, Nikkei rose 0.48%. Hong Kong HSI rose 5.90%. Singapore Strait Times rose 0.46%. Japan 10-year JGB yield rose 0.0183 to 0.250.

US ADP employment grew 208k, steady job gains

US ADP private sector employment grew 208k in September, slightly above expectation of 200k. BY sector, goods-producing jobs dropped -29k. But service-providing jobs rose 237k. By company size, small establishments added 58k, medium added 90k, large added 60k. Annual pay was up 7.8% yoy.

"We are continuing to see steady job gains," said Nela Richardson, chief economist, ADP. "While job stayers saw a pay increase, annual pay growth for job changers in September is down from August."

Germany Ifo: Wave of inflation isn't about to subside

According to an Ifo survey, price expectations of German businesses rose from 48.1 to 53.5. The balance is obtained by subtracting the percentage of companies that want to lower their prices from the percentage of those that want to raise their prices.

For food industry, the indicator rose further from 96.9 to 100, meaning that a 100% of food companies are expecting to raise prices.

"Unfortunately, this probably means the wave of inflation isn't about to subside," says Timo Wollmershäuser, Head of Forecasts at ifo. "Especially when it comes to gas and electricity, the price pipeline is not yet exhausted."

Eurozone PMI composite finalized at 20-mth low, hopes of avoiding recession further dashed

Eurozone PMI Services was finalized at 48.8 in September, down from August's 49.8, a 19-month low. PMI Composite was finalized at 48.1, down from prior month's 48.9, a 20-month low.

Looking at some member state, Ireland PMI Composite rose to 52.2 while France rose to 51.2. But Spain dropped to 48.4 (8-month low). Italy dropped to 47.6 (20-month low). Germany dropped to 45.7 (28-month low).

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: "Any hopes of the eurozone avoiding recession are further dashed by the steepening drop in business activity signalled by the PMI. Not only is the survey pointing to a worsening economic downturn, but the inflation picture has also deteriorated, meaning policymakers face an increasing risk of a hard landing as they seek to rein in accelerating inflation.

UK PMI services finalized at 50.0, energy crisis hit business and consumer spending

UK PMI Services was finalized at 50.0 in September, down from August's 50.9, weakest reading since February 2021. PMI Composite was finalized at 49.1, down from prior month's 49.6, lowest since January 2021.

Tim Moore, Economics Director at S&P Global Market Intelligence: "September data highlighted an absence of growth in the UK service sector for the first time in 19 months as the energy crisis continued to hit business and consumer spending.... Service sector businesses trimmed their growth expectations to the lowest seen for nearly two-and-a-half years in September, which survey respondents linked to concerns about falling disposable income and the unfavourable global economic outlook."

RBNZ hikes by 50bps, considered 75bps

RBNZ raises Official Cash Rate by 50bps 3.50% as widely expected. In the summary of record it's noted that the Committee considered whether to hike by 50bps or 75bps, but decided that 50bps was appropriate at this meeting.

In the statement, RBNZ noted that domestic spending has remained "resilient". Employment levels are "high" while productivity capacity is "constrained" by labor shortages. wage pressures are "heightened". Also, "spending continues to outstrip the capacity to supply goods and services, with a range of indicators continuing to highlight broad-based pricing pressures."

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 0.9862; (P) 0.9930; (R1) 1.0055; More...

Intraday bias in EUR/USD is turned neutral first with current retreat. On the downside, break of 0.9734 minor support will suggest rejection by 55 day EMA (now at 1.0022), and medium term falling channel. Bias will be turned back to the downside for retesting 0.9534 low and then resume down trend. Nevertheless, considering bullish convergence condition in daily MACD, sustained break of 55 day EMA (now at 1.0022) will raise the chance of medium term bottoming at 0.9534. Further rally should then be seen to 38.2% retracement of 1.1494 to 0.9534 at 1.0283.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 1.0197 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Economic Indicators Update

US ADP private sector employment grew 208k in September, slightly above expectation of 200k. BY sector, goods-producing jobs dropped -29k. But service-providing jobs rose 237k. By company size, small establishments added 58k, medium added 90k, large added 60k. Annual pay was up 7.8% yoy.

"We are continuing to see steady job gains," said Nela Richardson, chief economist, ADP. "While job stayers saw a pay increase, annual pay growth for job changers in September is down from August."

Full release here.