European recovery slowing but recovery still strong

• The Eurozone composite PMI for July came in at 60.2, slightly slower than the flash estimate but still representing an acceleration from the 59.5 level recorded for June. New orders were up to 60.3, their best print since May 2000. The higher composite number is being helped by broad-based growth in manufacturing (with PMIs released earlier in the week) along with services growth. The regional services sector PMI rose to 59.8, up strongly from 58.3 a month earlier and was the best print since mid-2006. While the ECB seems unprepared to dial back stimulus any time soon, the improvements in the Eurozone economy from a weak first quarter look entrenched and should shape up for solid growth in the remainder of the year.
• Other data from the Eurozone showed that retail sales rose 1.5% m/m in June, slower than expected and a deceleration from the rapid pace of more than 4% recorded for April. However, retail sales have now solidly recovered all their pandemic induced decline and appear to actually be above pre-pandemic trend levels. Core purchases, excluding food, still remain quite strong, rising 3.4% m/m and 6.5% y/y in June.
• In the UK the services PMI slipped to 59.6 from 62.4 a month earlier. New business activity slowed but at 56.6 remains comfortably above the 50.0 growth threshold. Consumption indicators in the UK have slowed in recent data prints and savings are still accumulating at a fast clip. The UK has had success in vaccinating a large share of its population but there anecdotally appears to be some reluctance for a full return to work which may be affecting the services sector more acutely.
• US data pushed and pulled overnight. The July ADP private sector payrolls report disappointed markets, coming in at just 330k jobs added for the month. That was less than half the level expected by the market and a considerable slowdown from the 680k jobs added in June. While the ADP doesn’t always serve as an accurate predictor for the NFP to be released later this week, the soft performance could keep markets on edge for any disappointment. But on the positive side the ISM services index for July came in better than expected, rising to 64.1 from 60.1 a month earlier. Business activity and new orders rose while employment also pushed back into expansion territory.

Today’s Economic Data and Events

10:00 GE factory orders m/m June: forecast 2%

15:00 UK Bank of England Bank rate: forecast 0.1%

16:40 US initial jobless claims July 31: forecast 383k

Fixed Income

• US Treasuries endured some wide two-way movement overnight. The disappointing ADP print helped to push Treasuries higher during the early part of the US sessions with 10y UST yields falling at one point down to as low as 1.21%. However, that dip in yields was relatively quickly recovered after Fed vice chair Richard Clarida said he expected an announcement this year on bringing an end to QE and rates would move higher in 2023.
• All told, the UST curve ended mixed. Yields for both the 2yr and 10yr USTs rose by almost 1bp to 0.1802% and 1.182% respectively. The NFP will be the next catalyst for a move in either direction with any disappointment likely to usher in more UST buying.
• Gilts will be in focus with the Bank of England setting policy later today. Yields on 10yr gilts swung sharply overnight, touching below the 0.5% level at one point before pushing up to near 0.54% and finally ending the day at 0.512%. Like USTs, gilts have recovered around half of their Q1 losses. The BoE is expected to keep policy loose.
• Emerging market bonds were mixed overnight. Both South African and Turkish bonds sold off with 10yr yields rising 5bps to 9.206% and 15bps to 16.665% respectively. Indian 10yr bonds were relatively unchanged ahead of the RBI meeting later this week where we expect no change in policy.

FX

• FX markets endured wide two-way action overnight in response to the soft ADP report with the dollar giving up ground before it surged later in the day on Clarida’s comments on potentially announcing tightening this year. The DXY index closed up 0.21% at 92.27.
• Even before the hawkish tone from Clarida, the euro was sinking earlier in the day in response to comments from ECB official Martins Kazaks that the bank wouldn’t be providing any near-term signals on when it will bring its asset purchases to an end. Kazaks noted that it was “quite unlikely” that the ECB would be finished with QE in March 2022 when the PEPP is set to expire.
• USDJPY recovered some of its recent losses, adding 0.4% overnight to 109.48 and is pushing higher this morning while GBPUSD sank 0.19% overnight to settle at 1.3889.
• Commodity currencies settled mixed with USDCAD closing nearly unchanged at 1.2540 while AUD fell 0.23% to 0.7379 while a strong labour market assessment for New Zealand helped to push the Kiwi up 0.44% to 0.7048.

Equities

• Global equity markets were mixed yesterday, and while some lead was taken from earnings results and Richard Clarida’s statements, market participants are likely largely waiting to see the NFP results for now. In the US, the NASDAQ closed up modestly with a 0.1% gain, but both the S&P 500 (-0.5%) and the Dow Jones (-0.9%) lost ground.
• In Asia, the Shanghai The Shanghai Composite has been calmer over the last several days after the regulatory issues continued to hit sentiment earlier in the week, and it is trading flat at the time of writing after gaining 0.6% yesterday. The Nikkei continues to lose ground in the face of rising Covid-19 Delta variant cases in Japan and closed down -0.2% yesterday, but it has recouped that in trading this morning and is up 0.3% at present.
• Within the region, the DFM closed up 0.6% but the ADX and the Tadawul both lost -0.4%. In Egypt, the EGX 30 lost -0.1%.

Commodities

• Oil prices extended losses for a third day overnight with Brent futures down 2.8% to USD 70.38/b and WTI sinking by more than 3.4% to USD 68.15/b. US crude stocks increased by 3.6m bbl last week although that was offset by a strong draw in gasoline inventories. Production in the US held flat at 11.2m b/d while demand was broadly unchanged at 21m b/d.
• Industrial commodities generally were hit by the hawkish turn in the dollar with both aluminium and copper prices sinking. Gold saw some extremely wide moves, surging in response to the weak ADP numbers before crashing quickly afterward on the rise in UST yields. Gold prices in the end closed nearly unchanged at USD 1,812/troy oz.

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