Markets:
The market focus temporary shifted from Fed Powell’s assessment on monetary policy at Friday’s Jackson Hole symposium to the EMU growth outlook. Activity in the EMU as measured by the PMI’s as expected/feared again contracted in August. The composite index dropped further below the 50-reference, easing from 49.9 to 49.2, the weakest level in 18 months. After unexpected resilience in H1, negative growth in Q3 looks ever more unavoidable. Contraction was mainly due to manufacturing activity (49.7), but the post-pandemic rebound in the services sector was also eroded by the negative impact of higher prices on demand (Services PMI at 50.2). Declining demand is weighing on orders causing a build-up in unsold inventories. ‘Concerns over the economic outlook meant that business confidence remained muted in August. This relatively weak sentiment, plus a sustained downturn in customer demand, meant that firms were increasingly reticent to expand staffing levels and the rate of job creation softened to the slowest in almost a year-and-a-half as a result’, the S&P assessment sounded. .Prices pressures remain elevated even as there are tentative signs that inflationary pressure has reached a peak. The PMI’s still painted a worrisome picture on the EMU economic performance, but optimists maybe will retain that the report at least wasn’t worse than expected/feared. (Interest) rate markets showed no clear directional reaction immediately after the PMI release. In the end, the established uptrend in yields simply continued. The German curve bear steepens with yields gaining between 1.5 bps (2-y) and 6 bps (10/30-y). The US yield curve shows a similar move rising up to 6.0+ bps (10-y). UK Gilts are again clear underperformers with yields jumping up to 16 bps (5-y) despite a mixed/unconvincing UK PMI (composite 50.9, but manufacturing tumbling to 46.0) and a poor CBI orders report (cf infra). Equities stayed under pressure for most of the session (Eurostoxx -0.1%, US indices open little changed), but the sell-off is far less aggressive than was the case yesterday. Gas prices (Dutch future reference contract) at € 266/mwh stay near record levels, but at least for now, one can hope for a lower daily close. Oil gains only marginally (brent $97,6/b) even as the Saudi Arabian Energy Minister warned that OPEC could cut production to bring the market ‘in line with fundamentals’.
An ‘in-line’ EMU PMI evidently wasn’t enough to change fortunes for the single currency. EUR/USD (0.995) keeps the established downtrend, even as some relieve kicked in this afternoon. The USD DXY index (109.00) just failed to touch the June top (109.29). Will Fed Chair Powell finally pull the trigger for a new episode in the USD ascent? The sharp rise in UK yields doesn’t change the trading dynamics for sterling. Cable (1.179) is holding near the YTD/cycle low, but the UK currency gains a few more ticks against the euro (EUR/GBP 0.8445)
News Headlines:
The Hungarian government submitted a comprehensive package of more than 10 legal changes to the EU to address all the Commission’s concerns. The EC is withholding around €6bn form the 2014-2020 EU budget and even more pandemic-related payments given concerns over alleged corruption and violations of the rule of law. Part of the funds are lost for good in absence of agreement by the end of the year. The EU stand-off adds to weakness in the local currency. Last week, it was one of the reasons for rating agency S&P to lower the outlook on the Hungarian BBB rating to negative. The forint trades near all-time record lows at EUR/HUF 412. The rising interest rate environment, the proximity to the Russian war in Ukraine and risk aversion in general weigh as well.
The Confederation of British Industry (CBI) published its monthly survey. It confirmed the grim picture of deteriorating growth and accelerating inflation. The total orders component fell from 8 to -7, the lowest level since August 2021. Finished stocks rose from -7 to 2. The inventory build-up was visible in today’s PMI’s as well. Effective output volumes for the next three months fell from 6 to -2. Average selling prices rose from 48 to 57, ending a two-month decline.
