Sunset Market Commentary

Markets

The ECB’s Bank Lending Survey was in the spotlights today. The quarterly questionnaire involving 158 banks showed credit standards for loans or credit to enterprises (commercial real estate and energy-intensive manufacturing in particular) and households – both for house purchases and other purposes – have tightened further in 2023Q2. “Higher risk perceptions related to the economic outlook and borrower-specific situation, lower risk tolerance as well as banks’ higher cost of funds contributed to the tightening”, the ECB explained. The financial sector for the current quarter expects a further, albeit more moderate net tightening of credit standards on enterprise loans while those for loans to households for house purchases are expected to be unchanged. Loan demand from firms dropped to an all-time low since the start of the survey in 2003. The net decrease was substantially stronger than banks expected in Q1 and driven by rising interest rates and lower financing needs for fixed investments. The respondents also pointed out a strong net decrease in household demand for housing loans. The demand decline is seen continuing in Q3 too, but at a much smaller pace. Today’s published survey is another sign that the ECB’s rapid tightening cycle is filtering through the economy as intended. Published simultaneously was the German July Ifo indicator. The headline figure missed the bar, coming in at 87.3 vs 88 expected and down from 88.6 in June. Things got particularly worse in the assessment of the current situation (93.7 to 91.3) by manufacturing, services and construction. The outlook was little changed, from 83.8 to 83.5 but with sectoral differences (worse in manufacturing, trade and construction but less pessimistic in services). German Bunds very briefly jumped higher in a Pavlov-reaction but soon pared those gains. Daily net changes vary between +1.4 to 2.3 bps across the curve. US yields slightly underperform, adding 2.1-3.2 bps with sharper than expected house price rises helping the move higher. FX markets trade muted ahead of key events including the Fed and ECB later this week. An (unconvincing) attempt by EUR/USD to recoup some of yesterday’s losses failed. The pair instead turned further south to test 1.1033 support zone. DXY ekes out a small gain to 101.58. EUR/GBP is testing 0.86 support after stronger-than-expected UK data (see below). The yuan is profiting from the measures announced by China to stimulate the economy/property sector. Australia and its Aussie dollar as a main trading partner got caught in the slipstream. A strong Asian equity performance barely filtered through in western dealings. The EuroStoxx50 trades flat, Wall Street adds no more than 0.3% (Nasdaq).

News & Views

Data published today by the Confederation of British industry painted a more benign/mixed picture compared to yesterday’s UK July PMI release. According to the quarterly trends survey, business optimism in July improved further from -2 in April to 6 reaching the highest level in two years. At the same time CBI warned on worrying signs that a margin squeeze and higher financing costs are hurting investment plans. The quarterly subseries on plant investment over the next twelve months declined from 14 to -1. In the monthly survey, orders also improved from -15 to -9, the best reading this year and above the long run average of -13. Both volume of output over the past 3 months (3 from -6) and expected output over the next three months (9 from 4) also improved. Expectations on average selling prices over the next three months eased slightly further from 19 to 18, but remain elevated.

According to the monthly business survey of the National Bank of Belgium, business sentiment in July deteriorated for the fourth consecutive month. The overall synthetic curve declined from -12.1 in June to -14.8 in July. The building sector was the only sector escaping the deterioration, more or less stabilizing at -5.8 (from -6.0). In business-related services, general market demand expectations have been sharply revised downwards for the second month in a row. Business leaders, turned extremely pessimistic on activity expectations last month and did not revise their assessment this month. They remain very wary, expressing an even more unfavourable view of their current activity levels. In the trade sector, the decline in the indicator is attributable to a marked downward revision of demand expectations and, to a lesser extent, employment expectations. In the manufacturing industry, all underlying components of the indicator are down, with the exception of the assessment of stock levels. The loss of confidence has particularly impacted employment expectations and demand expectations. The industry capacity utilization declined to 75.3 in July, compared to 77.7 in April.