Economic data disappointed yesterday

Economic activity data released yesterday was disappointing. The Eurozone’s final composite PMI reading for June came in lower than the flash estimate at 49.9, with the services index softening to 52.0 from 52.4 in the preliminary reading.

US factory orders were also weaker than forecast in May, rising just 0.3% m/m, with the April reading also revised slightly lower. Durable goods orders rose 1.8% m/m in May but this was largely due to aircraft orders; excluding transportation durable goods orders rose 0.7% m/m.

Minutes from the June FOMC meeting showed that “some” participants had favoured a 25bp rate hike last month, but were persuaded to vote for a pause. However, “almost all” participants expected rates to rise further this year. We expect the Fed to hike again in July taking the upper bound of the Fed Funds rate to 5.5%. The market is pricing an 85% probability of a July hike. Friday’s non-farm payrolls data will be key, as will the June CPI release next week. 

In China, the Caixin services index was much weaker than forecast in June, slipping to 53.9 from 57.1 in May and indicating slowing growth in services, which had been driving the recovery so far this year. The composite Caixin PMI fell to 52.5 last month from 55.6 in May.

Turkish consumer prices rose 3.9% m/m in June, slower than the median forecast, and the annual rate eased to 38.2% y/y from 39.6% in May. However, core CPI accelerated to 47.3% y/y from 46.6% in May, and the recent depreciation in the lira may fuel inflation in the coming months.

UNCTAD’s World Investment Report 2023 showed that the UAE attracted the most FDI inflows in the region in 2022, up 10% y/y to USD 22.7bn. Inward investment into the UAE has growth every year since 2015, as structural reforms have made the country an attractive destination for foreign investors. Outward direct investment from the UAE to the rest of the world also rose by 10% in 2022 to USD 28.8bn, making the UAE a net investor abroad in terms of FDI last year.     

Today’s Economic Data and Events

• 10:00 Germany factory orders (May) forecast 1.0% m/m
• 12:30 UK construction PMI (Jun) forecast 51.0
• 16:15 US ADP employment change (Jun) forecast 225k
• 16:30 US initial jobless claims (Jul 1) forecast 245k
• 17:45 US Services PMI (Jun) forecast 54.1
• 18:00 US ISM services index (Jun) forecast 51.3

Fixed Income

• Minutes from the June FOMC decision confirmed that Fed officials still see a need to move rates higher though there was some apparent disagreement about whether it was appropriate to pause at last month’s meeting. Yields on the 2yr UST pulled higher after starting off on a soft footing, ending the day up by about 1bps at 4.9445%. The 10yr UST yield added about 8bps to close at 3.9315%.
• In European bond markets gilts showed the largest move with yields up 8bps to 4.488% after a report suggested the Bank of England would need to hike much more than currently expected. Bund yield also settled higher, up 2bps at 2.473%.
• High yield and emerging market bond indices closed the day higher.

FX

• The US dollar pulled higher against peers overnight, helped by a steady rise in US Treasury yields. EURUSD dropped by 0.2% to 1.0854 while GBPUSD fell by almost 0.1% to 1.2704. USDJPY also moved against the yen with the pair up 0.1% at 144.66.
• Commodity currencies were more consistently weaker with USDCAD up nearly 0.5% to 1.3282. AUDUSD fell by 0.6% to 0.6655 while NZDUSD sank 0.2% to 0.6179.

Equities

• The hawkish bias portrayed in the Fed minutes released yesterday weighed on US equities and all three benchmark indices closed lower. The Dow Jones dropped 0.4%, while both the S&P 500 and the NASDAQ ended the day 0.2% lower.
• The sentiment was even more bearish in European trading earlier in the day, where the FTSE 100 ended down 1.0%. The DAX dropped 0.6% and the CAC 0.8%.
• Locally, the DFM slipped 0.2% while the ADX closed up 0.4%.

Commodities

• Oil prices rose overnight with WTI leading the way in catch-up trading after a US public holiday earlier in the week. WTI rose by 2.9% to USD 71.79/b while WTI added 0.5% to USD 76.65/b. The OPEC seminar currently underway didn’t reveal any substantial new developments as far as production targets. The UAE has said that it will not deepen its voluntary cuts “at this time” while Kuwait has indicated it sees no need to change its production quota.
• The API reported a draw in crude stocks of 4.4m bbl last week though there builds in both gasoline and diesel inventories.