Eurozone moves out of recession

• Economic momentum in China slowed in July as the recovery moderates from a burst of activity earlier in the year. The official manufacturing PMI fell to 50.4 from 50.9 in June while the services component moved to 53.3 from 53.5 a month earlier. Neither figure suggests a major downward shock to activity in China but it may temper the outlook for global growth in the second half of the year. Chinese firms continue to report high cost concerns and authorities in the country have been trying to get control of elevated commodity prices.
• The Eurozone economy recovered in the second quarter of the year, with regional GDP rising 2% q/q and moving the bloc out of a technical recession. Activity was led by the southern economies of the Eurozone with Spain and Italy both recording greater than 2.5% growth while Germany and France were relative underperformers, growing by 1.5% and 0.9% respectively. While the numbers will be welcome to policymakers in the eurozone, we doubt they are going to shift the ECB’s stance on policy in the near term. Other data from the Eurozone also showed improvements in the labour market with the total number of unemployed falling by more than 420k in June and brining the headline unemployment level to 7.7%. With improving vaccine rollout rates and accommodative policy from the ECB, the Eurozone economy looks set to remain buoyant for Q3.
• In the US, the PCE deflator held steady at 4% y/y for June, unchanged from an upward revised level for May. The core PCE deflator rose by 3.5% y/y, up from 3.4% a month earlier and its highest level since the early 1990s. Personal consumption improved in June, rising by 1% m/m, while incomes also rose, albeit by a marginal 0.1%. Additional unemployment benefits have started to be pulled back in many states and many Americans could endure weak income growth as a result. Estimates for Q2 GDP in the US also showed the economy expanding by 6.5% y/y, marginally higher from 6.3% in Q1. The second quarter data disappointed market estimates looking for more than an 8% expansion in Q2.
• Saudi Arabia’s net foreign assets rose in June, increasing by 2% m/m thanks to higher oil prices. Total reserves held by the Saudi Central Bank rose to SAR 1.66trn (USD 441bn), holding roughly steady with where reserves fell to during most of 2020. While reserve assets came off sharply in Q1 2020, since then they have managed to hold roughly stable albeit at a considerably lower level than peak levels of around USD 740bn hit in mid-2014.

Today’s Economic Data and Events

11:00 TU PMI Mfg July: prior 51.3

12:00 EC PMI Mfg July: estimate 62.6

12:30 UK PMI Mfg July: estimate 60.4

17:45 US Mfg PMI: estimate 63.1

18:00 US ISM Mfg: estimate 60.9

Fixed Income

• US Treasuries rallied into month-end although the final week of trading was choppy. A broad index of US Treasuries rose 1.4% in July, its fourth month in a row of gains even amid elevated inflation pressures in the US and hawkish commentary from several Fed officials. James Bullard, president of the St Louis Fed, said he wants asset purchases to be wound down by end of Q1 2022. However, doves also remain vocal: Lael Brainerd, a Fed governor, outlined that the labour market in the US still had “some distance to go” and said that current high inflation wasn’t impacting inflation expectations.
• Yields on the UST curve fell during the final week of July: 2yr UST yields settled at 0.1839%, down 1bps on the week and more than 6bps on the month. On the 10yr, yields closed at 1.2223%, off by 5bps on the week and more than 24bps for the month. The move lower in long-run yields was mirrored in Europe with 10yr bund yields falling 4bps last week to -0.462% (down 25bps on the month) and gilts down 2bps to 0.564% (down 15bps) on the month. Anxiety over the spread of the Delta variant of Covid-19 and more restrictions being reimposed will weigh on the outlook for growth in the remaining months of 2021.
• Emerging markets had a mixed week to end July. Indian government 10yr yields fell almost 2bps to 6.203% while South African yields pulled back much more strongly, falling more than 15bps to 9.182%. In Turkey, however, yields pushed back up and rose 17bps last week to 16.85% on 10yr local currency bonds. Turkey’s central bank revised its inflation projections for end-of-year 2021 to 14.1%, up from 12.2% previously. The CBRT is still short of market consensus of more than 16% end-of-year inflation.
• Major central banks meeting this week include Australia (August 3rd), Thailand (August 4th), England and Egypt (August 5th) and India (August 6th).

FX

• The dollar bounced at the end of the week as a risk-off tone grabbed hold of markets following disappointing tech earnings and uncertainty over Chinese equities. However, the 0.34% gain in the DXY on Friday wasn’t enough to push back against selling pressure from the rest of the week and the DXY index fell by nearly 0.8% last week, its largest weekly drop since May.
• The Euro was one of the major beneficiaries of dollar weakness with the single currency up by more than 0.8% w/w, closing at 1.1870 despite a small drop on Friday. Likewise sterling managed a solid weekly gain, up more than 1% to close at 1.3904 on the week.
• Commodity currencies had more of a mixed performance, with AUD slipping back and NZD closing unchanged despite some wide moves during the week. USDCAD moved in favour of the loonie with the pair closing down 0.7% at 1.2475.

Equities

• Sell-offs towards the end of the week saw most global equity indices close lower compared to the previous Friday, with China largely setting the tone as regulators moved on to the private tuition sector. The Shanghai Composite closed down -4.3% w/w, while the Hang Seng lost -5.0%. In Japan, concerns over the rapid spread of the Delta variant of Covid-19 saw the Nikkei lose -1.0% w/w.
• In Europe, the composite STOXX 600 closed up marginally at 0.1%, despite a -0.5% loss on Friday. The FTSE 100 gained 0.1% w/w, while Germany’s DAX lost -0.8% after supply chain issues saw Q2 GDP growth disappoint. The outperformer was Italy’s FTSE MIB, which gained 1.0% w/w after a strong GDP print.
• All three major US benchmark indices closed in the red on Friday, and down over the week. The NASDAQ was the biggest loser, dropping -1.1% w/w, while both the S&P 500 and the Dow Jones both lost -0.4%. US GDP growth came in shy of expectations in the second quarter in data released on Thursday.
• Within the region, the DFM closed down -0.1% w/w but most other indices closed higher. The ADX gained 4.2% while the Tadawul added 2.0%. In Egypt, the EGX 30 closed up 0.9% w/w.

Commodities

• Oil prices remain well supported by a tight fundamental picture, even as concerns mount over the spread of the highly transmissible Delta variant of Covid-19. Brent futures rose 3% on the week to settle at USD 76.33/b while WTI added 2.6% to close at USD 73.95/b.
• Total production from OPEC was up 230k b/d last month as Saudi Arabia has now unwound its voluntary cuts, with output rising nearly 500k b/d in each of the past two months. Production from the UAE was marginally higher while most other producers showed marginal declines or increases. Output from here on out should move higher on a more linear basis for those producers that are able. Even if production quotas are raised, many OPEC members will be suffering from a lack of investment that will keep output frustrated. 

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