US data disappoints, prompting sell off

The US ISM manufacturing index improved in August but remains in contractionary territory, rising to 47.2 from 46.8 a month earlier. Most of the gains, however, came from a decline in backlog of work, rising inventories and better supplier delivery times suggesting that underlying demand for goods in the US remains soft. There was a rise in the employment subcomponent of the index, to 46 in August from 43.4 a month earlier.

The China Caixin services PMI dropped in August to 51.6, down from 52.1 in July. The employment component of the PMI dropped to 49.7, suggesting firms were letting staff go while the prices charged element also declined, feeding into the disinflationary challenges for China’s economy.

The Riyad Bank PMI for Saudi Arabia’s non-oil sector improved to 54.8 in August, up from 54.4 in July. New orders increased to 56.8 along with an improvement in new export orders. The employment sub-component rose strongly to 53.6 in August, up from 51.2 a month earlier, while input prices cooled marginally but remained above the neutral 50 level. Output prices rose slightly to 48.3, up from 47.2 a month earlier. In Egypt, the S&P Global PMI rose to 50.4 in August, its first time above the neutral 50 level in the last three years. Output rose to 50.4 in August, up from 49.2 a month earlier, while new export orders and future output both improved. Input prices rose sharply, however, to 59.1 in August, up from 55.2 a month earlier, while output also picked up, rising to 54.4 in August from 51.7 a month earlier.

Inflation in Turkey dropped sharply in August, down to 51.97% y/y from 61.78% a month earlier. Core inflation also slowed considerably, down to 51.56% in August from more than 60% in July. Both measures were, however, above market expectations. On a monthly basis, headline prices rose by 2.5% in August. Utility prices were up more than 100% y/y in August while education, hospitality and health care costs were among the other main drivers of inflation in August. Turkey’s central bank has kept policy rates on hold at 50% since March this year, having hiked rates from 8.5% in H1 2023. The central bank is targeting end-of-year inflation at 38% and inflation at 14% at the end of 2025.

South Africa’s economy expanded by 0.4% q/q in Q2, up from no growth in Q1 this year. Manufacturing and utilities both swung back to growth in Q2, of 1.1% and 3.1% respectively, after having declined in Q1 this year. On an annual basis, the economy expanded by 0.3% y/y. Household spending rose by 1.4% q/q while fixed capital formation rose by 1.4% q/q.

Today’s Economic Data and Events

• 12:00 EC HCOB composite PMI (final) Aug: forecast 51.2
• 12:30 UK S&P Global composite PMI (final) Aug: forecast 53.4
• 17:45 CA Bank of Canada rate decision: forecast 4.25%
• 18:00 US JOLTS job openings Jul: forecast 8.1m
• 18:00 US factory orders Jul: forecast 4.7%
• 22:00 US Fed beige book

Fixed Income

• US Treasuries rallied as a sell-off in risk assets prompted a flight to safety. Yields on the 2yr UST fell about 5bps to 3.8631% while the 10yr UST yield fell 7bps to 3.813%. Markets have upped their expectations for the scale of the Fed cut later this month to 35bps as risk-off sentiment takes hold.
• Benchmark bonds generally had a strong day as investors sought out havens. Bund yields fell 6bps to 2.274% while the 10yr gilt yield dropped 6bps to 3.988%. Accordingly, high-yield bonds sold off yesterday though emerging market bonds seemed to take the broader sell-off in their stride.
• The new issue tap has opened wide since the start of September among GCC issuers. PIF has mandated banks for a USD 3yr sukuk around T+110 and will tap a pre-existing green bond due October 2032 for USD 500m. Elsewhere, RAK bank is pricing a USD 250m 10.25yr NC at around the 6.3% level while Al Ahli Bank of Kuwait has mandated banks for a benchmark USD perp. In Turkey Yapi Kredi has mandated banks for a USD-denominated Eurobond.

FX

• Currency markets reflected investor anxiety about the cooling economic data coming out from the US. The US dollar rose against most peers though USDJPY pushed lower, down almost 1% to 145.48, and USDCHF also dropped, down 0.2% to 0.8503 as investors sought havens. The strength in CHF comes even as Swiss inflation moderated again, setting up the SNB for another quarterly cut at its next meeting.
• EURUSD dropped by 0.3% to close the day at 1.1043 while GBPUSD fell 0.2% to 1.3114. Commodity currencies fared worse with a 1.2% drop in AUDUSD to 0.6711, NZDUSD fell 0.7% to 0.6187 while the Loonie weakened, helping USDCAD rise by 0.4% to 1.3551.

Equities

• There was a rout of global equities overnight as data disappointed. The Dow Jones dropped by 1.5% while the decline in the S&P was even worse at 2.1%. European stocks weren’t spared the weakness with a drop of 1.2% in the Euro Stoxx 50 index while the FTSE fell by 0.8%.
• Asian markets are under heavy selling pressure today with the Nikkei down 3.2% while the Hang Seng is off by almost 1.5%.
• Local markets were largely closed by the time the sell-off took hold in a material way. That meant that the DFM and ADX were both able to hold rallies of 0.3% and 0.2% respectively while the Tadawul rose by 0.1%.

Commodities

• Oil prices dropped sharply overnight in line with weaker risk assets but also beset by their own softening fundamentals. Brent futures fell 4.9% to USD 73.75/b while WTI was lower by 4.4% to USD 70.34/b. That weakness extended across the barrel with an enormous drop in gasoline futures and declines in gasoil/diesel markets.
• Libya’s central bank governor remarked that a deal could be reached between competing political factions that would allow oil production and exports to resume, according to press reports. While market estimates for Libya’s production were lower last month, overall OPEC production was only modestly down thanks to higher production from Nigeria, Kuwait and some smaller producers.