Markets
Global PMI’s called off ongoing tests of key technical resistance levels (cycle highs) in core bond yields. Both the August EMU and UK composite gauges flashed the recession alarm, diving below the 50 boom/bust mark as the services sector joined the ongoing slump in manufacturing. Unfortunately for Europe, this is accompanied by sector input prices and wages increasing at an accelerated pace. As a result, the ECB may be more reluctant to pause the hiking cycle in September than the headline PMI figures suggest. The biggest drag came from a steep drop in the German services sector. The UK downward surprise was even bigger than the European one with July and August PMI’s suggesting a 0.2% Q/Q GDP decline in Q3 so far. Companies reported reduced orders and a further pull-back in hiring. Price pressures are moderating, but not at a sufficient pace to keep the BoE from hiking in September. Core bonds rallied (short squeeze) with German yields ending 9.5 bps (30-yr) to 13.5 bps (5-yr) lower. UK gilt yields tanked 13.9 bps (30-yr) to 19.2 bps (5-yr). The euro lost ground on first national releases with both EUR/USD and EUR/GBP losing first support levels at 1.0834 and 0.8504 respectively. The break in EUR/GBP was rapidly undone by the UK PMI, but also EUR/USD returned to opening levels to eventually close at 1.0863. The 200d moving average around 1.08 proved to tough to crack. European stock markets eventually closed near unchanged not knowing whether to cheer for the fallback in rates or to worry about weak PMI’s. The US PMI decreased as well, but both services and composite measures held above the 50-line. The release didn’t provoke much additional market reaction. In other economic news, the Bureau of Labour Statistics downwardly revised payroll growth in the year through March by 306k. That’s less than the 500k whisper number and doesn’t fundamentally change the underlying picture of a resilient and robust US labour market. US yields fell 7.7 bps (2-yr) to 13.2 bps (10-yr) yesterday. US equity markets rallied up to 1.1% for the S&P and 1.6% for Nasdaq, anticipating strong results by Nvidia. The latter even exceeded lofty expectations after US close, sending the share another 6% higher in after-market trading and lifting spirits in Asian trading this morning. Today’s eco calendar is unlikely to inspire trading with July durable goods orders and weekly jobless claims. Speeches by Philly Fed Harker and by Boston Fed Collins are wildcards. Overall market positioning is again more neutral after yesterday’s correction and going into tomorrow’s key Jackson Hole speeches. It lowers the probability to see high profile technical breaks in FI/FX and stock markets.
News and views
The Bank of Korea this morning unanimously decided to keep its policy rate unchanged at 3.5%. The BoK last raised its policy rate in January. In new forecasts, the central bank expects the economy to grow 1.4% this year (unchanged from May). Growth for next year was slightly downwardly revised from 2.3% to 2.2% reflecting the impact of slower growth in China. Consumer price inflation this year is still seen at 3.5%, but core was slightly upwardly revised to 3.4%. Next year, inflation is expected at 2.4%. At the news conference, Governor Rhee admitted that there might be arguments to give more weight to growth, but inflation remains the most important with financial stability also an important topic. The BoK is concerned over high levels of consumer debt. According the Rhee, six board members kept the door open for one more rate hike if necessary. The won recently lost against a strong dollar. It strengthened to USD/KRW 1321 this morning, to be compared with a ST low of 1343 last week.
In an interview with the newspaper Hospodarske Noviny, Czech central Bank Member Jan Kubicek indicated that sales of returns on the CNB’s foreign reserves will be done in a way that will affect the FX market as little as possible. The sales of returns shouldn’t have the effect of FX interventions. Sales are a way to manage the bank’s balance sheet. They are not a policy tool. Kubicek also indicated that the CNB sees the neutral long term nominal interest rate at a level of near 3%.
