Global PMIs point to further contraction

• Flash PMI readings for the July PMI out of Europe yesterday pointed to further contractions in the private sector. France’s manufacturing and services PMI fell to 49.0 and 51.0 respectively, bringing the composite figure down to 49.8, well below market estimates of 51.0. This is the lowest level recorded in France since the Omicron wave of disruptions hindered supply chains and global activity in early 2021.  Readings from Germany were slightly more mixed – manufacturing PMI grew improved from 49.3 to 49.8 from 49.3, beating the consensus figure, but services fell from 49.7 to 48.2, bringing the composite for July to 47.6 from 48.1 a month earlier. The wider Eurozone followed this trend, declining with declines in both manufacturing and services, bringing the composite figure down to 49.2 from 49.9. This marks the second successive month of contraction, fuelled by a particularly sharp decline in economic output from Germany, as high elevated inflation and increased higher interest rates place a growing strain on demand.
• Consumer confidence in the Eurozone improved slightly in August but still remained low at -24.7, according to a survey from the European Commission. The prospect of higher energy costs and higher interest rates will be weighing heavily on consumers and business and signs are increasingly looking as though the bloc will fall into a recession in the near term.
• The UK saw a substantial decline in its manufacturing PMI, slowing to 46.0 from 52.1 to 46.0, the lowest reading since April 2020. By contrast the services figure displayed a more marginal decline, falling to 52.5 from 52.6 and beating market expectations. The composite figure fell from 52.1 to 50.9, in line with consensus. This deep downturn in manufacturing activity will be of particular concern for the UK and may bring forward expectations of a recession which the Bank of England had been pitching for later in the year.
• In the US, the composite PMI reading for August fell sharply into contraction territory, falling to 45 from 47.7 a month earlier. A big drop in services, which declined to 44.1 from 47.3, was behind the drop in the composite index, suggesting consumers are growing more wary of spending their disposable income while prices are rising quickly and the economic outlook is worsening. Manufacturing performed relatively better, declining as well but managing to stay in the positive side of the ledger at 51.3. Somewhat encouragingly for an improvement in inflation though, input prices in the PMI hit their lowest level in 19 months.
• New home sales in the US fell in July for their sixth consecutive monthly decline. At 511k, the level of sales was well under market expectations and its lowest level since 2016. The housing market in the US has been steadily moving softer in the last few months as higher borrowing costs bite into purchasing activity, whether for new or existing homes.  

Today’s Economic Data and Events

• 12:00 SA CPI y/y July: forecast 7.8%
• 16:30 US durable goods orders July: forecast 0.8%
• 18:00 US pending home sales m/m July: forecast -2.8%

Fixed Income

• US Treasuries oscillated sharply as the weak data out overnight—the poor composite PMI and another drop in new home sales—added to perceptions of a recession underway in the US. The 2yr UST yield fell more than 10bps from peak to bottom before recovering later in the session and settling the day at 3.2997%, down just 1bps. The 10yr yield saw similar moves, falling back at one point below the 3% handle before it recovered and settled at 3.0461%, up 3bps.
• Minneapolis Fed president Neel Kashkari said that with the US at “maximum employment” and “very high inflation” it was clear that the Fed needed to tighten monetary policy to bring the economy “into balance.” A notable dove, Kashkari has moved into convergence with the rest of the Fed in keeping a hawkish tone as the central bank seeks to combat high inflation seemingly entrenched in the US economy.
• European bond markets continue to be battered by weak economic data and poor economic news. Yields on the 10yr bund rose by 1bps to 1.312% while the similar maturity French bond yields added 2bps as did Italian bonds. In the UK, the 10yr bund added 6bps to 2.571%.
• In emerging markets, the 10yr South African bond fell with yields up by 2bps. Inflation data out later today may reinforce expectations that the SARB needs to maintain a hawkish stance after hiking by 75bps at its last meeting.

FX

• Currency markets reversed course after the weak US data overnight with gains across all major peers compared with the US dollar. EURUSD still closed below parity, up 0.27% at 0.997, but has given back much of those gains in early trade today. GBPUSD added 0.6% to 1.1836 while USDJPY fell by 0.5% to 136.77.
• Commodity currencies were near identical in their moves. USDCAD fell in favour of the loonie by 0.8% to 1.2955 while AUDUSD added 0.8% to 0.6931. NZDUSD gained 0.8% to 0.6216.

Equities

• Weak PMI numbers and ongoing concerns around Fed tightening and what commitments might be made to continue at Jackson Hole this week continued to weigh on stocks yesterday. In the US, the NASDA closed almost flat but the S&P dropped -0.2% and the Dow Jones closed -0.5% lower. Similarly in Europe, the CAC and the DAX both lost -0.3% while the UK’s FTSE 100 lost -0.6% on the day. An outlier was Italy’s FTSE MIB which gained 1.0% yesterday, but remains one of the worst performing indices ytd.
• Locally, the ADX closed -0.2% lower and the DFM lost -0.5%. In Saudi Arabia, the Tadawul lost -1.1%. Losses continue in early trading in Asia this morning, where the Shanghai Composite and the Hang Seng are both down -1.1% at the time of writing, while the Nikkei is -0.3% lower.

Commodities

• Brent futures closed back up above USD 100/b for the first time since the start of August, rising by 3.9% overnight on the back of the comments from Saudi’s oil minister that OPEC+ could step in to tighten balances. WTI also got a boost, up by 3.9% to USD 93.74/b.
• Data from the API showed a draw in US crude inventories of 5.6m bbl last week while gasoline and distillate stockpiles showed more modest builds.
• Gold prices snapped their recent slump, gaining for the first time in the last seven days. Prices rose by 0.68% to USD 1,748/troy oz. Should Fed chair Jerome Powell talk up a hawkish stance at the Jackson Hole summit over the weekend, more downside could open for gold prices.

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