Eurozone PMI data surprised to the upside

A somewhat brighter picture of the Eurozone economy emerged from the January flash reading of the S&P Global PMI. The composite index rose above the 50 no-change level for the first time since June 2022, to reach a value of 50.2 from 49.3 in December. This was slightly above consensus expectations for a value of 49.8. Underlying the move in the composite value was a rise in the services activity sub-component to 50.7 from 49.8 in December. There was also an improvement in the manufacturing PMI, although it remained in contractionary territory, at a value of 48.8 from 47.8 the month prior. There was also more optimism to be found in businesses expectations for the coming year, with sentiment rising across both manufacturing and services businesses. New orders fell for the 7^th consecutive month in January but at the slower pace. In response to improving sentiment and a slowing pace of decline in demand, businesses increased hiring, with employment rising at its fastest pace in 3 months.

In contrast to the more upbeat picture painted by the Eurozone PMI release, the January flash S&P Global/CIPS PMI print for the UK pointed to a marked deterioration in momentum in business activity. The UK Composite index fell to 47.8 in January from 49 in December, a more significant slowdown than the consensus expectation for a drop to 48.8. The fall was driven by a decline in the service activity sub-component, which fell from 49.9 in December to 48 in January, its steepest pace of decline in 2 years. The manufacturing output index remained in contractionary territory, although the pace of decline slowed, leaving the January value at 46.6 in January from 44.4 the month prior. Input costs eased but average prices charged rose, as businesses sought to pass on a portion of recent wage rises.   

There were further declines in US private sector business activity in January, as measured by the S&P Global flash US PMI. The composite indicator rose to 46.6 from 45 in December. However, being below the neutral 50-mark the January reading suggests that activity was still contracting, albeit at its slowest pace since October. Services activity and manufacturing output recorded similar rates of decline with readings of 46.6 and 46.7, respectively in January. New orders fell for the fourth consecutive month and there were further declines in the backlog of work. Despite this there was a marginal rise in employment on the month, driven by service sector firms. January marked the end of 7 months of moderation in input price rises, with costs rising at a faster pace on the month. Higher wage bills were one reason given for the uptick.     

Today’s key economic data and events

• 13:00 German IFO surveys (Jan)
• 19:00 Bank of Canada rate decision forecast: 25bps hike

Fixed Income

• Benchmark bond markets had a strong day overnight, even as better than expected PMI prints raise the likelihood of further hawkish moves from central banks. Yields on the 2yr UST closed lower by about 2bps to 4.2103% while the 10yr yield fell 6bps to 3.4527%. In Europe, bund yields closed lower by 5bps at 2.144% while gilt yields fell 9bps to 3.27%.

FX

• The dollar closed lower overnight with most of the losses caused by another day of gains for EURUSD. The single currency added 0.1% to 1.0887, propelled higher by the better than expected flash PMI prints for January. In the UK, though, weaker than expected growth numbers helped to sink GBPUSD, dropping by 0.4% to 1.234. USDJPY moved lower by 0.4% to 130.17.
• Commodity currencies closed relatively muted with gains of about 0.2% in AUDUSD to 0.7046 and a similar rise in NZDUSD to 0.6504. USDCAD closed unchanged.

Equities

• Much of Asia remains closed in terms of equity markets, but Japan’s indices remained bullish yesterday as the Nikkei closed up 1.5%. European markets were somewhat less sanguine as the DAX dropped 0.1% and the FTSE 100 0.4%, although the CAC ended the day 0.3% higher.
• In the US, only the Dow Jones gained yesterday, adding 0.3%, while the S&P 500 dropped 0.1% and the NASDAQ 0.3%. With Fed commentators in their blackout period, earnings season will be the key driver of sentiment until the FOMC meeting.
• Locally, the DFM gained 0.4% and the ADX 0.6%. Saudi Arabia’s Tadawul closed up 0.3% while Egypt’s EGX 30 gained 1.6% to close up 12.6% ytd in local currency terms.

Commodities

• Oil prices settled lower overnight with Brent down 2% at USD 86.13/b and WTI falling by 1.8% to USD 80.13/b. Data from the API showed another weekly build in US crude inventories, up by 3.8m bbl last week while official data is out later this evening.

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