US manufacturing PMI at record high

• The flash IHS Markit US composite Purchasing Managers' Index, which tracks the manufacturing and services sectors, dropped to a four-month low of 59.7 from 63.7 in June, as business activity grew at a moderate pace for a second straight month in July on supply constraints, moderating economic activity after what was expected to have been a solid Q2. The survey showed the flash services sector PMI fell to a reading of 59.8 from 64.6 in June, also down from May's record high, with firms citing labor shortages and difficulties acquiring stock for the slowdown. Furthermore, the survey reported that companies are passing on to consumers the higher production costs brought about by raw materials and workers shortages, and this is pushing away some customers. However, the survey's measure of prices paid by services businesses slipped to 72.1 from a reading of 74.2 in June, possibly indicating that inflation may be peaking. The survey's flash manufacturing PMI rose to a record high of 63.1 from 62.1 in June. A measure of new orders received by factories increased and manufacturers reported unfinished work continued to rise even as hiring improved, the survey also showed suppliers continued to struggle to deliver inputs on time.
• In a letter to House of Representatives Speaker Nancy Pelosi and other congressional leaders from both parties on Friday, US Treasury Secretary Janet Yellen asked lawmakers to increase or suspend the nation's debt limit as soon as possible and warned that if Congress does not act by August 2  the Treasury Department would need to take extraordinary measures to prevent a US default. Yellen said that October 1st, the first day of the next fiscal year, could be an important date for the US ability to pay its obligations without debt limit legislation due to large federal outlays scheduled for then. Republicans have used the debt limit issue to attack Democrats for pushing legislation that they say has led to inflation and rising public debt. A failure to sort out differences among lawmakers over whether government spending cuts should accompany an increase in the debt limit, currently set at USD 28.5tn, could lead to a federal government shutdown - as has happened three times in the past decade or even worse, a debt default. Yellen added it was unclear how long the Treasury measures would last, citing heightened uncertainty about forecasting payments and revenues due to the pandemic. She added there are scenarios under which Treasury's cash and extraordinary measures to continue borrowing could be exhausted soon after Congress returns from its summer break in September.
• The Euro Zone IHS Markit's flash composite Purchasing Managers' Index rose to 60.6 in July from 59.5, its highest reading since July 2000, as the loosening of restrictions gave a boost to services. The services PMI jumped to 60.4 from 58.3, its highest since June 2006, with the outlook looking bright ahead, as the new business index rose to 59.7 from 58.7, one of the highest readings in the survey's history. The manufacturing sector also enjoyed a strong month with the PMI falling slightly from June's record high of 63.4 to 62.6. An index measuring output that feeds into the composite PMI fell to 60.9 from 62.6, while input prices index held steady at June's survey high of 88.5.

Today’s Economic Data and Events

• 12:00 EU German Ifo Business Climate Index (Jul) Forecast 102.1
• 18:00 US New Home Sales (Jun) Forecast 800K

Fixed Income

• US Treasury yields managed to push higher over the course of last week after a substantial drop on July 19th, caused by mounting anxiety over the spread of the Delta variant of Covid-19. Yields closed lower on the week overall with 2yr UST yields falling more than 2bps to 0.1981% and 10yr yields off by a bit more than 1bps to 1.2763%. So long as fears over the spread of the Delta variant remain in place, particularly amid a stalling vaccine programme, the risk of yields touching the lower end of their current range remains high.
• European bond markets showed some whipsaw action in response to the ECB’s strategy adjustment—expecting rates to remain at their current level or perhaps even lower until inflation in the eurozone sustainably hits 2%. Bunds ended the day higher following the announcement on July 22nd and 10yr yields ended the week lower by almost 7bps at -0.421%.
• Emerging market bonds were relatively quiet in the past week with Indian 10yr yields rising 1bps to 6.222% by the end of the week and 10yr South African yields adding 3bps to 9.337%. Turkish markets were closed for the Eid holidays.
• Markets this week will be focused on the FOMC decision on July 28th with scrutiny focusing on how the Federal Reserve will characterize the sharp drop in yields. No other substantial change in policy is expected at this time although any qualification on the tenure of asset purchases will also be a driving force for yields in the short-term.

FX

• Risk anxiety appeared to have got the better of the markets and the dollar was bid up nearly across the board. The DXY index closed 0.24% higher last week, at 92.912 and comfortably above a support of 92.63. The Fed will be the main catalyst for moves in FX markets this week with any signal on a pull back of asset purchases likely to help propel the dollar higher.
• The Euro showed some volatility in response to the ECB’s policy adjustment but still trended lower over the course of the week. At 1.1771 the pair is holding close to a support level of 1.1779 and any substantial mover lower could open up a retest of 1.16. USDJPY also gained after a plunge at the start of the week related to risk-off moves. The yen closed the week at 110.55, up 0.44%. GBPUSD managed a more restrained decline of 0.14% to settle at 1.3748.
• The sharp sell-off to the start the week put commodity currencies on the back foot for most of the trading week with AUD and NZD falling 0.47% and 0.36% respectively. USDCAD was the only pair to move against the dollar with the loonie adding 0.4% to settle at 1.2564.

Equities

• After a poor start on Monday following on from the rise in US jobless numbers published on Thursday, equity markets picked up through the end of the week. In the US, a stronger-than-expected PMI manufacturing print, alongside some strong earnings reports, saw new record closes for all three benchmark indices on Friday. The NASDAQ was the key gainer over the week, adding 2.8%, while the Dow Jones added 1.1% and the S&P 500 2.0%.
• In Europe, the composite STOXX 600 also hit a new record high as it climbed 1.5% w/w, with France’s CAC gaining 1.7%. Gains were more muted in the UK (0.3% for the FTSE 100) and Germany (0.8% on the DAX), and concerns over the spread of the Delta variant and its effect on travel and hospitality stocks in particular remain to the fore in many European countries.
• Asian equity markets were the underperformers last week, as Japan’s Nikkei lost -3.7% w/w and the Hang Seng -1.7%, although the Shanghai Composite did add 0.3% over the period.
• Regional equity markets were largely closed over the last week for the Eid al-Adha holiday.

Commodities

• Oil prices were hammered at the start of the last trading week in response to demand fears from the spread of the Delta variant but also an OPEC+ deal that would see the bloc continue to add barrels incrementally over the next year and a half. Both Brent and WTI managed to recover most of their losses though and ended the week modestly higher at USD 74.1/b and USD 72.07/b respectively.
• After a sharp drop at the start of the week, time spreads for both Brent and WTI managed to recover and still point to tight market conditions. On 1-6 month spreads, Brent closed at a backwardation of USD 3.86/b—having falling to less than USD 2.40/b at the start of the week—while the same spread for WTI ended the week at USD 3.54/b.
• Gold prices failed to show much of their safe haven allure last week, moving only marginally higher in Monday’s volatile day. Prices for gold actually fell over the course of the week in line with a stronger dollar and higher—albeit low—UST yields. Industrial metals prices were generally higher as infrastructure and industry demand is unlikely to be affected in the near term by the Delta variant.

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