PMI surveys slip but still indicate robust expansion

• Manufacturing activity remained buoyant in July across the Eurozone even as the regional manufacturing PMI slipped to 62.8 from 63.4 a month earlier. Germany ‘s factories were the relative outperformer with the national PMI rising to 65.9 from 65.1 a month earlier while figures for Italy and France moderated. Employment was reportedly boosted in July as industry responds to reopening demand while also reporting record increases in input costs.
• The UK also showed a moderation in manufacturing activity in July but at 60.4 still represents a healthy pace of growth. New orders slipped in the July print to 57.3 from 64.2 a month ago but nevertheless shows that the UK is still recovering solidly out of lockdowns imposed earlier in the year.
• In the US the ISM manufacturing gauge weakened for July, slipping to 59.5 from 60.6 a month earlier. Production and new orders were the main contributors to the decline while employment rose back up above the 50 level. While not a disastrous data print, the July ISM nevertheless affirms that the US economic recovery is slowing and may be more of a grind in the remaining months of 2021. Some the supply chain constraints that built up earlier in the year also appear to be easing somewhat with delivery times and input prices declining.

Today’s Economic Data and Events

08:30 RBA cash target rate: forecast 0.10%

11:00 TU CPI y/y July: forecast 18.6%

18:00 US durable goods orders June F: forecast 0.8%

Fixed Income

• US Treasuries started the first trading day of August on a very solid footing with gains across the curve. With the Delta variant of Covid-19 ripping globally and threatening headline growth and disrupting global supply chains, economic risks in the near term appear increasingly risked to the downside. Yields tumbled across the curve with 2yr UST yields closing below the 0.18% level for the first time since mid-June while 10yr UST yields fell more than 4bps to 1.1773.
• The downward pull in yields ignored a call from Fed governor Christopher Waller that an announcement on bringing an end to asset purchases could come as early as next month, backing up a view from St Louis Fed president James Bullard for asset purchases to end full stop by Q1 2022.
• The move lower in US yields was consistent with a general drop globally with 10yr gilt and bund yields also falling to their lowest levels since the start of the year. Emerging markets bonds also received a boost even as risk assets generally were offered. Yields on Indian bonds held roughly steady, albeit with a downward bias, but South African and Turkish 10yr yields fell 6bps and 35bps respectively.
• Fitch affirmed their ‘BB+’ rating on Arabian Centres and kept the issuer on a negative outlook. The agency also maintained its ‘B+’ rating on National Bank of Egypt with a stable outlook.

FX

• Currency markets were mixed overnight with early risk-on tone fading as the US session came in. After sliding for much of the day the dollar ended up slightly lower with the DXY index falling by 0.14% to 92.048. In early trading today the index is broadly unchanged.
• EURUSD failed to gain any real material benefit from the improvement in regional PMIs. The single currency closed the day flat at 1.1870 and is only barely moving upward this morning. The yen received a haven bid however, with USDJPY falling 0.37% overnight to 109.31. The pair has now fallen for five of the past seven days as markets attune themselves to risks from the delta variant.
• GBPUSD slipped at the start of the week, falling by 0.15% to 1.3883 while commodity currencies were mixed. AUD will be in focus this morning with the RBA holding a rate decision (no change expected).

Equities

• Equity markets started the week on the front foot, with some of the recent concerns over Chinese regulation and a rapidly spreading Delta variant eased off moderately. In China, the Shanghai Composite managed 2.0% of gains, although it is trading down once more in morning trading today, down -0.3% at the time of writing. The Nikkei also reversed some recent losses yesterday with a 1.8% gain, but is back down -0.8% today so far.
• In the UK, the FTSE 100 gained 0.7% yesterday, while the small-cap FTSE 250 added 1.0% to close at a record high. The British indices were bolstered by strong factory output data in the PMI surveys and on the back of announced buy-outs. Elsewhere in Europe, the CAC gained 1.0% while the DAX lagged with a 0.2% gain.
• In the US the momentum seen earlier in the day waned later in the session as the ISM survey came in, and the three major indices did not manage to hit new highs. The NASDAQ closed up 0.1% but remained off the previous week’s record, while the Dow Jones (-0.3%) and the S&P 500 (-0.2%) both closed lower.

Commodities

• Oil prices took a battering to start the trading week as markets respond to governments imposing new restrictions related to the spread of the delta variant. Brent futures fell 4.5% to USD 72.89/b while WTI sank more than 3.6% to USD 71.26/b. Soft data out of major Asian economies is also likely not helping sentiment toward demand, even as signs of Indian oil consumption are recovering.

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