US manufacturing sector grew in August

US survey data overnight was better than expected with the manufacturing PMI and the ISM manufacturing index both remaining in expansion territory at 51.5 and 52.8 respectively in August, better than the consensus forecast. Price pressures also appeared to have eased last month, with the prices paid (input costs) component of the ISM falling to 52.5 last month from 60.0 in July, and supply chain performance improving as well.
US construction spending fell by -0.4% m/m in August, a bigger than expected decline. Meanwhile non-farm productivity fell by -4.1% in Q2 even as unit labour costs rose 10.2%. Declining GDP and strong jobs growth had pointed to lower worker productivity.
Both the Eurozone and the UK’s manufacturing PMI came in below the neutral 50-level, at 49.6 and 47.3 respectively, indicating contraction in the sectors in August. The UK reading was higher than in July however, and also above the consensus forecast of 46.0.
The focus today is August employment data for the US, with the market expecting non-farm payrolls increased by 298k, slower than July’s 528k reading, and the unemployment rate remaining at 3.5%. Average hourly earnings are forecast at 0.4% m/m and 5.3% y/y, slightly faster than in July.
The UAE is planning to finalise a free trade agreement with Turkey in the coming weeks according to a social media post by UAE trade minister Thani Al Zeyoudi. Discussions on a deal began four months ago.

Today’s Economic Data and Events

Fixed Income

US Treasuries extended their losses for the week on the back of another decent data print, this time the ISM manufacturing index for August. Yields rose later in the day with the 2yr UST recovering some of its lost ground to end the day at 3.4994% though it has pushed above 3.5% in early trade today. The 10yr UST yield added 6bps to close at 3.2533%.
Raphael Bostic, president of the Atlanta Fed, said the Fed had “work to do” in its campaign to bring inflation lower and warning that a soft landing is a “very hard thing to do.” Bostic doesn’t vote on policy this year but his commentary may be able to help tighten markets at the margins.
European bonds remain offered with losses across the board, even as it does look as though some kind of coordinated response to energy prices is in the offing. Yields on 10yr bunds added 2bps to 1.555% while the 10yr gilt continues its vertiginous ascent, rising almost 8bps to 2.874%. The poor economic outlook for the UK amid still high inflation will likely mean the Bank of England has to hike rates and contribute to a much weaker economic story, worsening sentiment toward UK assets generally.

The dollar was solidly higher against peers overnight as markets look ahead to what may be another robust non-farm payrolls report that supports a hawkish stance from the Fed. After some early drifting EURUSD broke its winning streak with a 1% drop to 0.9946%, erasing the last three days of gains. ECB officials are making noise about a 75bps hike at their meeting at the end of next week but it will leave the bank still playing catch up to the Fed.
USDJPY broke above the 140 level overnight, its highest level since August 1998. With no change in the fundamental picture, the prosect for an even weaker JPY appears on the cards. GBPUSD is also testing new low levels, down 0.66% overnight to 1.1545. The next target is the 1.1412 March 2020 level and after that much more considerable downside could be at risk.
Commodity currencies were all lower against the dollar though CAD fared best, with USDCAD limited to a 0.19% increase to 1.3155. AUDUSD dropped 0.79% to 0.6788 while NZDUSD fell by 0.64% to 0.608.

Equities

There was a little relief for US equities yesterday as both the S&P 500 (0.3%) and the Dow Jones (0.5%) gained following days of sharp losses. However, the growth stock-heavy NASDAQ continued to fall, dropping a further -0.3% yesterday.
In Europe, there were losses across the board once again as the energy outlook worsened further. The CAC, the DAX and the FTSE 100 dropped -1.5%, -1.6% and -1.9% respectively.
Locally, the DFM dropped -0.8% and the ADX -1.6%. The Tadawul closed down -1.2%.

Commodities

Oil prices fell sharply again as the recession risk sentiment takes hold amid a much higher outlook for US policy rates. Brent futures fell by 4.3% to USD 92.36/b while WTI closed down 3.3% to USD 86.61/b. Both are tentatively higher in early trade this morning.
The next major catalyst for prices will be the OPEC+ meeting next week where we would expect the producers’ alliance to keep output targets for October onward unchanged to try and put a floor under prices.