Markets
The dollar returned from a long weekend and immediately left a stamp on trading. EUR/USD lost support from the lower bound of the 2023 upward sloping trading range at around 1.0785 before moving further south towards next support at 1.0735 (December 2022 interim high). That technical level is currently under heavy test as well. DXY (trade-weighted dollar, 104.58) temporarily rose above 104.7 resistance (May correction high). USD/JPY hits a new 2023 high at 147.40 with few to no obstacles in the way for a return towards the October 2022 multi-decade top. A risk-off environment that spilled over from Asian dealings into Europe couldn’t completely explain the strong move. The likes of the EuroStoxx50 indeed opened with losses of about 1% but pared losses as the session evolved. Most indices currently even trade flat. US Treasuries do underperform German Bunds today. Yields rise 2.5-4.9 bps across the curve with real yields accounting for about half of the move higher again. The 10-y real yield variant is nearing the 2% level again, the highest since 2009. Aside from monetary policy expectations (high for longer) we’d argue that it reflects at least as much the resilience of the US economy. Fed’s Waller in an interview today said that data is looking “pretty good” in terms of avoiding a recession. He did add that the recent batch doesn’t say the Fed needs to do anything imminent and that it can proceed carefully. His comments further downplay chances for a September hike but lift those for a final increase in November marginally. German Bund yields tried to join the US higher but lack momentum. They currently trade 0.8-3.1 bps higher. European data came in mixed and offered little guidance. In its consumer inflation survey, the ECB said 1-year ahead expectations stopped declining and stabilized at 3.4%. The 3-year ahead series even ticked higher from 2.3% to 2.4%. Final PMIs were revised downwardly, with services now standing at 47.9 instead of the preliminary 48.3. The composite gauge as a result fell to 46.7, the lowest since November 2020, instead of the initial 47. Unlike in the US, worsening growth prospects prevent European real yields to rise as much as they should to act forcefully against high inflation. A Bloomberg article today, which was given little market attention, mentioned that speculation is mounting for the ECB to shrink its bond portfolio faster than currently as a countermeasure. APP is being wound down as fast as bonds are maturing (about €30/m on average for the next 12 months). PEPP reinvestments run through 2024 but calls are growing for a faster ending.
News & Views
South African GDP grew by 0.6% Q/Q in Q2 (1.6% Y/Y), beating the 0.3% Q/Q consensus estimate and slightly outpacing Q1 growth (0.4%). The supply side picture shows that six of ten industries recorded growth with manufacturing and finance outperforming. The main drag came from utility and from transport. The demand side picture showed an increase in investments (3.9% Q/Q) and government consumption (1.7%) with net exports (-2.4%) and household consumption (-0.3%) decreasing. Customers cut back expenses on nearly every category apart from health, education, transport and restaurants & hotels. Apart from GDP numbers, the August South African PMI rose significantly in August (51 from 48.2). It’s only this year’s second 50+ reading (February). S&P Global, responsible for the survey, talks about an encouraging turnaround in the private economy midway through the third quarter with companies reporting an increase in output for the first time in a year and order books starting to improve even as inflation saps spending power. Input purchases rose the strongest since June 2022. The August improvement is welcome, but doesn’t balance relatively weak growth in H1 2023. The South African rand can’t profit from today’s better-then-expected figures. USD/ZAR closes in on the August high at 19.30. Higher core bond yields are to blame.
The Swedish services PMI crashed from 53.4 to 49 in August, erasing the July uptick. The composite measure followed, declining from 51.9 to 48.1 and returning back to contraction territory where it had been all year. Details showed a huge setback in new orders which had triggered the July spike (46.3 to 58) with actual and planned business volumes both dropping. Companies significantly reduced their order backlog, but employment remains surprisingly strong. Supplier input prices accelerated to their highest level since December of last year (69.6 from 62.2) suggesting no signs of easing price pressure. The Swedish krone is again at the backfoot, closing in on the all-time lows just below EUR/SEK 12.
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