September PMIs show further economic weakness in Europe

Preliminary PMI data for the Eurozone and the UK released at the end of last week showed a further weakening in economic activity in September. The Eurozone composite PMI improved slightly to 47.1 from 46.7 in August, as the relative strength of services offset a further decline in the manufacturing PMI to 43.4. Germany’s manufacturing PMI likely weighed on the regional index, although there was modest improvement to 39.8 in September from 39.1 in August.

The UK’s composite PMI slipped to 46.8 according to the flash September reading, down from 48.6 in August, and the lowest level in more than two and a half years. The Bank of England apparently had early access to the PMI data last week, and it likely contributed to the decision to keep rates on hold. The services PMI may have been particularly concerning, as it fell to 47.2 this month, the lowest level since January 2021.

Flash PMI data for the US showed a more resilient economy than in Europe, with the composite PMI largely unchanged from August at 50.1. While momentum in services activity has slowed in recent months, it remains in positive territory. There are some signs of a recovery in the manufacturing sector but output is likely to be affected by the autoworkers strike which began mid-September and may disrupt vehicle production for several weeks.  

There is a raft of economic data for markets and policy makers to assess this week, including second estimates for Q2 GDP growth in the US and the UK. US personal income and spending data for August, along with the Fed’s preferred measures of inflation – headline and core PCE inflation – will also be closely watched, with core PCE inflation expected to dip below 4% for the first time in almost 2 years. Preliminary inflation data for the Eurozone is forecast to show further slowing in headline CPI in September, although it is likely to still be well above target.    

Today’s Economic Data and Events

• 12:00 GE IFO business climate (Sep) forecast 85.2

Fixed Income

• US Treasuries closed higher at the end of the week despite no substantial catalyst on Friday. Overall movement last week was dominated by the hawkish spin from the Fed on where policy could go from here, even as they held rates unchanged at last week’s FOMC meeting. Yields on the 2yr UST fell 3bps to 5.1097% on Friday while the 10yr yield dropped 6bps to 4.4337%.
• Fed futures are pricing in just under 50% probability of another rate hike from the Fed before the end of the year. For 2024, the futures now imply 66bp in cuts in H2.
• European bonds closed mixed at the end of the week with bund yields near flat while gilt yields pulled lower, down 5bps at 4.24%.

FX

• The Japanese yen was the standout mover at the end of the week as the Bank of Japan struck a dovish tone. The pair added 0.5% on Friday to close at 148.37 with seeming no barrier to testing weaker levels for the yen. Sterling also closed the day weaker, down 0.5% at 1.2241 as markets remained underwhelmed by the Bank of England’s commitment to fighting inflation. By contrast, EURUSD was little changed at 1.0653.
• There was a general swing higher in commodity currencies with both AUDUSD and NZDUSD gaining. USDCAD closed near flat at 1.3483.

Equities

• US markets declined on Friday, to cap off the worst week for US equities since March 2023. The Dow Jones, the S&P 500, and the NASDAQ fell 0.31%, 0.23%, and 0.1% respectively.
• Major European equity markets also ended Friday lower. The Eurostoxx 50 index lost 0.13%, the DAX fell 0.1% and the CAC 40 declined 0.4%. The FTSE 100, in contrast, rose 0.1%. 
• Locally, the ADX and the DFM declined, falling 0.1% and 0.27%, respectively.

Commodities

• Oil markets ended the week mixed with Brent near unchanged at USD 93.27/b on Friday and WTI adding 0.5% to USD 90.03/b. Both benchmarks were lower for the week with some of the froth coming out of the recent rally in prices.

• Russia will ban exports of refined products to keep domestic markets well supplied. Diesel prices had already been leading the oil market higher in recent weeks and the tightness of supply could add even more upward pressure.