Markets
Today’s PMI’s should further shape markets’ and central bankers’ assessment on how much further policy tightening is needed to bring inflation back to target in a sustainable way. EMU February PMI’s at least suggest that tightening already put in place by the ECB (and other central banks) probably didn’t restore the demand supply balance in a way that guarantees a sustained return to the 2% target. The composite PMI rebounded decisively further into expansionary territory from 50.3 to 52.3 (vs 50.7 expected). The move was driven by the services sector (53 from 50.8 vs 51.0 expected). The headline figure for the manufacturing sector declined slightly from 48.8 to 48.5, but this was partially due to lower delivery times. Input prices cooled, especially in the manufacturing sector. However, regarding prices charged for goods and services, S&P said they are still increasing at a solid rate as firms sought to pass higher costs on to customers, including in many cases greater staff costs. Firms are further hiring, albeit at a slower pace than in January, but this is partially due to labour shortages. The main message from the PMI’s is that activity in the EMU economy is improving faster than expected with a better outlook. While many bottlenecks disappeared, especially selling prices remain elevated for an important part due to high wages. S&P global concludes that this ‘will naturally encourage a bias towards further policy tightening in the months ahead’. German/European yields continued recent protracted uptrend. German yields are rising between 5.5 bps (2-y) and 7.5 bps (10-y). The 2-y yield continues to set new cycle peak levels as money markets are considering the ECB raising its policy rate (well) beyond 3.50% by the summer. The German 10-y yield continues to attack the 2.50%/2.57% resistance. US bond markets clearly ‘feared’ strong US PMI’s with yields already gaining up to 9 bps points in the run-up to the release. The US February composite PMI (50.5 from 46.8 vs 47.5 expected) indeed improved much more than expected, narrowing the gap with much more optimistic signs from (especially) the services ISM. US yields currently are rising between 12.25 bps (5-y) and 9 bps (2& 30-y). The dollar recorded modest gains for most of the day, but is gaining some further traction post US PMI’s. EUR/USD trades in the 1.0650 rea. USD/JPY is attacking the 135 big figure. US equities opened with losses of 0.75% (Dow) to 1.15% (Nasdaq). The Euro Stoxx 50 again outperforms (-0.33%). Losses hardly grow post US PMI.
News & Views
The UK February composite PMI unexpectedly spiked from 48.5 to 53, an 8-month high. The services PMI showed a similar jump (53.3 from 48.7) with the manufacturing PMI still below the 50 boom/bust mark, but increasing from 47 to 49.2. Details showed a swift and significant jump in output. Supplier delivery times improved at the fastest rate since June 2009 for manufacturers. New work rose at the quickest pace since May 2022 for services. The easing of input prices (especially manufacturing) didn’t translate into improved costs for customers. The services sector referred to rising salary costs while skills shortages remain widespread. Following PMI’s, UK markets followed recent trends witnessed in the EMU and the US: discounting a more hawkish policy rate path for the central bank. UK Gilts underperform with yields rising between 11.5 (bps) and 19.5 bps (2-yr). Money markets start pondering the possibility that the BoE’s policy rate will end up above 4.5% this summer (4% now). Sterling enjoys the rate support with EUR/GBP tanking around 1 big figure to levels below 0.88.
Headline Canadian inflation rose slightly less than forecast in January, up 0.5% M/M vs 0.7% consensus. Higher gasoline prices contributed the most to M/M increase, followed by a rise in mortgage interest costs and meat prices. The Y/Y comparison slowed from 6.3% to 5.9%. Prices for cellular services and passenger vehicles contributed most to the deceleration. Underlying core CPI slowed less than the headline outcome with the median down from 5.2% Y/Y to 5% Y/Y and the trimmed mean measure decelerating from 5.3% Y/Y to 5.1% Y/Y. The loonie ticked lower on the data (USD/CAD 1.35) as they leave room for the flagged conditional pause in the policy rate cycle by the Bank of Canada in March. It remains a tight call though following blowout Canadian payrolls earlier this month.
