PMI numbers disappoint across the board

The preliminary estimate of the HCOB Eurozone composite PMI suggests that private sector activity in the bloc continued to contract in August. The composite measure declined from a value of 48.6 in July to 47 in August, significantly below expectations. Notably, there was evidence of a contraction in services activity for the first time since the end of 2022, with the services index declining to 48.3 in August from 50.9 the month prior. While the manufacturing index remained in contractionary territory in August, the pace of contraction slowed marginally, with the index rising to 43.7 from 42.7 in July. Within the EuroZone, preliminary figures were also released for France and Germany. Although both composite indices fared worse in the flash estimate than had been expected, the decline was particularly marked for Germany. The HCOB composite index for Germany fell to 44.7 in August from 48.5 in July, underpinned by a material contraction in activity in the services sector.

The weakness in the underlying EuroZone economy was also reflected in the August flash estimate of EuroZone consumer confidence, which declined to -16 from -15.1 in July. Consensus expectations had been for an improvement in the measure to -14.5.

The preliminary reading of the S&P Global/CIPS UK composite PMI fell from 50.8 in July to 47.9 in August. As in the Eurozone, the services sector has been a relative bright spot for the UK economy, but the most recent outturn suggests that there has been a contraction in private sector services activity, with the service sector index falling to 48.7 in August from 51.5 in July. The manufacturing sub-component also declined to 42.5 from 45.3 in July. Although both remained above the neutral-50 mark, there were also declines in the composite employment balance from 51.5 to 50.4 and in the composite output price balance to 55 from 57.9.     

The preliminary August reading of the S&P Global US composite PMI remained only fractionally over the neutral-50 level, declining to 50.4 from 52 in July. The decline in the composite index was driven by falls in the values of both the manufacturing and services sub-components. The manufacturing index suggests that the pace of contraction in the sector picked up, with the reading falling to 47 from 49 in July. In contrast, the services sector continued to expand in August, albeit at a slower pace, with the index value falling to 51 from 52.3. Surveyed companies reported weak demand on the back of the combination of high prices and rising interest rates.

Today’s Economic Data and Events

• 15:00 TU one week repo rate: forecast 20%
• 16:30 US initial jobless claims, w/e 19 Aug: forecast 240k
• 16:30 US durable goods, Jul: forecast -4% m/m

Fixed Income

• Disappointing PMI numbers across the board helped benchmark government bonds rally strongly overnight. The US, Eurozone and UK all endured PMI prints falling short of expectations and prompting a rethink on how far central banks will need to take their tightening of monetary policy. Yields on the 2yr UST dropped about 8bps to 4.9667% while the 10yr yield fell 13bps to 4.1918%. Markets are very tentatively pricing in a first rate cut from the Fed in March next year.
• European bonds rallied even further as markets price out any additional hikes from the ECB. Bund yields dropped 13bps to 2.512%, paced by French and Italian bonds, while gilt yields dropped 17bps to 4.463%.
• Emerging market bonds generally had a strong day overnight as the pullback in rate expectations helps to fuel risk appetite. South African 10yr yields fell 19bps to 11.719% while Turkish 10yrs closed near unchanged.
• Markets will be watching for rate actions from the central banks in Turkey and Indonesia today.

FX

• The drop in US Treasury yields did the US dollar no favours overnight with most currencies rallying. EURUSD added 0.2% to 1.0863 while USDJPY moved lower by 0.7% to 144.84. Commodity currencies had as strong pull upward with AUDUSD up by 0.9% to 0.648 while NZDUSD gained 0.6% to 0.5979 and USDCAD moved lower by 0.2% to 1.3526. The notable outlier was sterling where GBPUSD closed near unchanged at 1.2727.

Equities

• There was a pickup in sentiment in equity markets yesterday, bolstered by some weak economic data and strong results for major tech firms. In the US, the NASDAQ ended the day 1.6% higher. The Dow Jones added 0.5% and the S&P 500 gained 1.1%.
• The day was also positive in Europe, where the STOXX 600 gained 0.4%. The UK’s FTSE 100 was the outperformer as it added 0.7% on the day.
• Locally, the DFM closed up 0.8% while the ADX dropped 0.4%. In Saudi Arabia the Tadawul closed down 0.1%.

Commodities

• Oil prices closed lower for a third day running with Brent futures down 1% at USD 83.21/b and WTI sinking by more than 1.8% to USD 78.89/b. Commercial crude stocks in the US fell by 6m bbl last week according to the EIA though that was offset by builds in gasoline and distillate stockpiles. Oil production ticked up by 100k b/d to 12.8m b/d.