Markets
Weaker-than-expected August ADP job creation and a downward revision to (outdated) US Q2 growth & PCE (core) inflation triggered a kneejerk move higher in US Treasuries yesterday. Gains didn’t survive the day though and yields eventually ended only marginally lower at the front end of the curve. It suggests market caution going into Friday’s payrolls. It wouldn’t be the first time the official labour market snaps a streak of underwhelming data (JOLTS and US consumer confidence disappointed at face value on Tuesday). Inflation numbers released in Germany (slower easing than hoped for) and Spain (reacceleration) provided counterweight as well. Bunds underperformed but finished off the intraday lows. Yields rose between 2.5-3.5 bps across the curve. The euro as a result had the upper hand. EUR/USD rose from as low as 1.0855 to 1.0923. DXY (trade-weighted dollar) slipped towards the recently recovered resistance of 103.16 (23.6% recovery of the September 2022 – July 2023 decline). The Japanese yen failed to capitalize on USD weakness. USD/JPY even ended the day slightly higher at 146.24. It isn’t leaving the recent highs just yet. The British pound was the star performer in the G10 landscape. EUR/GBP dipped back below 0.86 even as gilts outperformed their German counterparts. Stocks traded choppy in Europe while eking out gains ranging between 0.11-0.54% on the major Wall Street exchanges. Asian dealings aren’t very informative either. Equity performance is mixed with China lagging regional peers. PMI business confidence in the country highlight the ongoing struggle despite a glimmer of hope for a manufacturing sector bottoming out (see below). The Chinese yuan is among the weaker currencies this morning. The yen gains a few ticks, regardless of BoJ’s Nakamura arguing against his hawkish colleague Tamura’s case laid out on Wednesday. Tamura said negative rates could potentially end early next year. But according to Nakamura “the sustainable and stable achievement of the 2% inflation target accompanied by wage growth isn’t in sight yet.” Other currencies including the US dollar as well as core bonds show little direction.
Today’s economic calendar is all about inflation. The July PCE (core) deflator is due in the US with consensus expecting 0.2% m/m growth that brings the yearly figure up from 3% to 3.3% (4.1% to 4.2%). We have a neutral bias on the outcome. But being the Fed’s preferred inflation gauge and looking at the price action earlier this week, markets are probably more sensitive to a downward surprise. European HICP is due too. Following the Spanish and German readings yesterday and the minor upward Dutch surprise this morning, risks to the 5.1% headline and 5.3% core consensus are tilted to the upside. While that’s priced in to some extent already, we do think it at least offers a floor for European yields in particular. It may also further shape expectations for a September ECB hike, which markets currently give a less than 50% chance. In similar reasoning EUR/USD’s downside is limited from a daily perspective. Several ECB and Fed speeches are scheduled for today as are the ECB’s meeting minutes of the July meeting. They serve as a wildcard for trading.
News and views
The official Chinese August composite PMI ticked up from 51.1 to 51.3 in August, ending a 4-month decline. Details showed a small improvement in manufacturing (49.7 from 49.3) compensating for a setback in non-manufacturing (51 from 51.5). Manufacturing details showed new orders in positive territory (>50) for the first time since March. Companies keep shedding jobs (48) while price gauges hint at building price pressure (input costs 56.5 from 52.4 & output costs 52 from 48.6). Details in the services sector were weaker with the decline in new orders accelerating (47.5 from 48.1) and employment below the 50-mark for a 6-month running. China’s government recently announced a number of measures to revamp the economy/consumer spending. The Chinese currency remains stuck around the USD/CNY multiyear low of 7.30.
New Zealand’s main opposition party – National Party – who leads in opinion polls ahead of the national October 14 vote, said that it would quickly overturn the ruling Labour Party’s change to the central bank’s mandate (RBNZ). During their current tenure, they expanded it from solely focusing on returning inflation to the 1%-3% objective to also achieving maximum sustainable employment. The National Party accuses Labour of economic mismanagement and blamed it for fueling rampant inflation. “We want to build confidence that the Reserve Bank will be focused on that inflation mandate. We don’t see it as something novel. We see it just as a return to what was the position prior to the current government.”
