Flash PMIs point to contraction in Europe, recovery in US

The UK’s Office for National Statistics published a new set of employment and unemployment data yesterday, after the response rate for the old Labour Force Survey declined. The new data suggests that the labour market continued to soften in August, with employment declining by -82k. The unemployment rate declined slightly to 4.2% in August from 4.3% in the previous series.

The flash UK PMI for October came in slightly higher than expected but still in contraction territory, with the composite index at 48.6. The manufacturing PMI rose to 45.2 while the services PMI slipped to 49.2 this month as high interest rates weighed on output. Business optimism about the outlook weakened from September. The data suggests that the UK economy likely contracted in Q3, reinforcing expectations that the Bank of England will keep rates on hold at the MPC meeting next week.

The Eurozone preliminary composite PMI for October declined to 46.5 from 47.2 in September, with both the manufacturing and services components coming in lower than expected. Encouragingly, price pressures appear to be easing in the Eurozone, according to the survey.

In contrast, the US flash composite PMI came in higher than expected at 51.0 this month, up from September’s reading of 50.2. The manufacturing PMI rose to 50.0 after five months in contraction territory, while the services PMI rose to 50.9. Price pressures in the US appeared to have eased in October, with the composite selling price index falling to a three-year low.

China looks set to provide more support for the economy, with lawmakers approving an increase to the fiscal deficit ratio to 3.8% of GDP this year, up from 3% previously. Additional debt of CNY 1tn (USD 137bn) will be issued in Q4 2023.

Today’s key economic data and events

12:00 GE IFO business climate survey (Oct) forecast 86.0

18:00 Bank of Canada rate decision, forecast 5.0%

18:00 US new home sales (Sep) forecast 680k (+0.7% m/m)

Fixed Income

• 10y bond yields declined almost across the board yesterday after Monday’s volatility.  US 10y treasuries fell almost -3bp to 4.82% although the 2y rate rose to 6bp to 5.11% after an auction of 2y notes indicated softer demand. A 5y bond auction is scheduled for today and a 7y bond auction is planned for tomorrow. Increased supply of government bonds on the back of a high federal government deficit is one factor weighing on US treasuries and keeping yields elevated.
• UK 10y gilt yields declined almost -6bp yesterday to 4.53% while 10y bund yields fell -4.5bp to 2.82%

FX

• EUR, GBP and and JPY all gained against the dollar yesterday, while CHF was broadly unchanged.
• Commodity currencies also gained against the USD yesterday with AUD up 0.8% to 0.6355, NZD up 0.5%, CAD rising 0.3% and ZAR gaining 0.1% against the greenback.

Equities

• The US market closed higher on Tuesday. The S&P 500 halted the five-day decline, closing up 0.7%, supported by bullish forecasts from Verizon, 3M, and General Electric. The Nasdaq also closed higher, gaining 0.9%. 
• European stocks also had a positive session, with the UK’s FTSE closing higher 0.2%, the DAX up 0.5% and the CAC40 closed 0.6% higher.
• Locally, the DFMGI closed up 0.3% while the ADGI closed flat. The Tadawul ASI gained 0.8%.

Commodities

• Oil prices declined again on Tuesday, with WTI down more than 2% to USD 83.74/b while Brent closed 2% lower at USD 88.07/b as the conflict in Israel remains contained for the time being.