US manufacturing loses momentum

• Manufacturing data out of the US at the end of the week affirmed the slowdown underway in the US economy. The ISM manufacturing index fell to 53 in June, its lowest level in the past two years, and well off the level of 56.1 a month earlier. While the numbers are still solidly in expansion territory, the June print confirms a slowing trend in place since April. New orders and employment were a particular drag on the June reading.
• Eurozone inflation in June came in faster than expected at 8.6% y/y, up from 8.1% previously despite a slowdown in German inflation numbers. Energy was the principal driver of higher prices along with high food prices. Core inflation was slightly lower, at 3.7% from 3.8% previously. Germany’s specific case for June was thanks to cheaper public transport options and lower road taxes, helping to bring services inflation lower. With inflation running well ahead of the ECB’s target level we see few barriers to the central bank hiking rates this month, potentially by more than the 25bps they had outlined.
• The UAE and Indonesia have signed a comprehensive economic partnership agreement to increase bilateral trade by USD 10bn by the end of the decade. According to media reports the deal will target logistics, tourism, communications and construction.

Today’s Economic Data and Events

• 11:00 TU CPI y/y June: forecast 79.95%
• 11:00 TU PPI y/y June: forecast 132%

Fixed Income

• US Treasuries rallied strongly last week as markets bring forward expectations for a US recession. A broad index of US Treasuries gained 1.3% last week, its best weekly performance since H1 2020 when the Covid-19 pandemic was in full swing. The 2yr UST had a sharp single-day gain on Friday alone in the wake of softer than expected manufacturing numbers with yields down by 12bps to 2.8329%, bringing the total weekly decline to 23bps. On the 10yr UST, yields dropped by 25bps last week to 2.8803%, their first daily close below the 3% since the start of June.
• Options markets closed last week with a peak in the Fed funds rate at just under 3.4% by March 2023 before moving lower over the rest of the year. Minutes from the June FOMC—where the Fed hiked by 75bps—will set the tone for the week on how focused the Fed is on inflation compared with other economic signals. Jobs numbers for June are also expected to come in at a still strong +270k which may push back against the inflation narrative somewhat.
• European bonds also showed some strong gains with the reversal in German yields particularly notable. The 2yr Schatz yield fell almost 30bps last week to 0.449%; that compares with a higher of 1.22% only as recently as June 14th. On the 10yr bund, yields closed last week at 1.229%, down 21bps. In the UK the 2yr gilt yields closed lower by 26bps to 1.661% while the 10yr gilt yield was down 22bps at 2.083%.
• Emerging market bonds were mixed over the week. South African 10yr yields closed higher by around 21bps to 10.877% while the same maturity Indian bond yields slipped by about 3bps to 7.418%. 
• In the region, Moody’s affirmed their rating on Morocco’s sovereign debt at ‘Ba1’ and changed the outlook to stable from negative.
• In central banks this week, Israel sets policy at the start of the week with a 50bps hike expected. Elsewhere the RBA (50bps hike expected) meets on July 5 and Malaysia’s central bank sets policy on July 6 (25bps hike expected). Sri Lanka’s central bank meets later in the week amid the economic crisis affecting the country.

FX

• Currencies endured a choppy week as markets oscillated between expectations that central bankers will go all in on fighting inflation versus halting the hiking cycle early to avoid pushing economies into recession. FX markets moved toward risk off positions at the end of the week, helping to set up a weekly gain for the dollar against most peer currencies. EURUSD closed last week down by 1.3% at 1.0414 while GBPUSD fell by 1.4% to 1.2095, its lowest level since mid-June. USDJPY appeared to get the benefit of risk-off flows with a drop of 0.4% on Friday to 135.21 helping to keep the currency roughly flat on the week.
• In commodity currencies there was little room to hide from the risk-off sentiment. USDCAD managed to hold off the best though still ended the week with a higher bias, settling at 1.2899. AUDUSD meanwhile dropped by 1.9% to 0.6814 even ahead of a large 50bps hike expected from the RBA this week while NZDUSD fell by 2% to 0.6192.

Equities

• Equity markets capped off their worst first half since 1970 with further losses last week, albeit pared slightly with some gains on Friday. In the US, the NASDAQ was the biggest loser as it lost -4.1% w/w, followed by the S&P 500 which fell -2.2% and the Dow Jones which lost -1.2%.
• There were losses across the board in Europe, with the composite STOXX 600 dropping -1.4% w/w. Germany’s DAX and France’s CAC both lost -2.3% over the week, while the UK’s FTSE 100 fell by a more modest -0.6% as the index remains a global outperformer this year.
• Asian markets had a comparatively better week, boosted by positive news around China’s Covid-19 restrictions. The Shanghai Composite gained 1.1% w/w and the Hang Seng 2.8%. In Japan, however, the Nikkei lost -2.1% w/w.
• Locally, the ADX gained 1.2% w/w while the DFM closed flat. UAE supermarket chain Union Coop has announced plans to list on the DFM on July 18.

Commodities

• Oil prices closed mixed last week in the wake of OPEC+ sticking with its plan for a 648k b/d increase in output in August. Brent futures settled down by 1.3% to USD 111.63/b while WTI added about 0.8% to USD 108.43/b. Market surveys of OPEC production show how challenging hitting the higher target levels in August will be given that member nations are still failing to hit the prior lower levels. Total OPEC output fell by 120k b/b m/m in June, according to Bloomberg surveys with production down by 100k b/d in Nigeria along with notably lower volumes from Iraq, Kuwait and Libya where production has been affected by political unrest. Saudi Arabia managed to increase output by just 20k b/d to 10.45m b/d—it is targeted to hit more than 11m b/d by August—while the UAE’s output rose by 90k b/d to 3.19m b/d.

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