• US PMI’s unexpectedly turned out to have the biggest intraday market impact yesterday. Traditionally, they don’t carry that much weight with main focus on monthly ISM surveys. A significant setback In the August US services ISM (44.1 from 47.3 vs 49.8 expected) temporary stopped the USD-rally while providing (minor) intraday relief for US Treasuries. Especially as they were followed by a huge drop in new home sales (see below) and bigger than expected decline of the Richmond Fed Manufacturing Index (-8 from 0 vs -2 expected). In the end, they didn’t alter the technical pictures though. EMU PMI’s earlier on the day fell as well, but the setback was modest and largely in line with consensus. The US treasury yield curve eventually steepened with daily yield changes ranging between -1 bp (2-yr) and +3 bps (30-yr). The German yield curve steepened as well with yield changes varying between -4 bps (2-yr) and +3.5 bps (30-yr). The long end of the yield curves probably suffered from a late spike in oil prices which needed some time to soak the Saudi hint on an OPEC production cut. Brent crude touched $100/b for the first time since early August. EUR/USD closed at 0.9970 following a volatile day in between 0.9901 (new low) and 1.0018. Sterling recovered some additional ground against the euro following last week’s failed test of the EUR/GBP 0.85 area. Gilt underperformance for now beats dismal eco numbers. European and US stock markets managed to limit the losses to around 0.5%.
• Today’s eco calendar is thin with only US durable goods orders and pending home sales. They probably won’t have any intraday market impact. Following yesterday’s price action (intraday attempt to correct on ruling trends), this setting might set the stage for some consolidation. Since early last week, markets went to a more neutral positioning going into Friday’s key note address at the Jackson Hole symposium by Fed Chair Powell. Minneapolis Fed Kashkari overnight strengthen the Fed’s guide line that it’s “very clear” that the Fed needs to tighten monetary policy further. The very worse outcome is an unanchoring of inflation expectations which would ask a Vocker-esque response by the Fed. Therefore, frontloading is the way to go, even as the economy shows signs of slowing.
• US new home sales in July dropped to the lowest level since 2016. Sales declined 12.6% M/M to reach an annualized pace of 511 000. The June figure was also downwardly revised to 585 000. Sales of New homes in July were 29.6% lower compared to the same month last year. The peak of the current cycle was set in January of 2021 (993k). The slowdown is sales is caused by an ongoing rise in mortgage rates. Still, homes prices continue to rise. The average US new house price in July rose 18.3% Y/Y. At the same time, the inventory of new homes available for sale rose to 464 000, the highest level since 2008. While construction of most of these house still had to be finished, the high inventory gradually might slow prices rises over time.
• According to a report of CTK news service, the Czech government and the labor unions agreed on a 10% pay increase from September for a group of 365 000 public sector employees. The increase applies to civil servants and non-teaching staff in education. The pay rise is calculated to have an additional budgetary cost of CZK 1.1bn this year. 2022 wage growth is still subject to a further agreement. The wage increase comes in a context where Czech inflation already printed at 17.5% Y/Y in July and is expected to near the 20% area later this year.
The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.
The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT will hit max speed by September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.
The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments going into the Jackson Hole gathering and the simultaneous sell-off in bonds & equities push the euro to new sell-off lows below parity. This year’s downward trend channel suggests more downside.
Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move . EUR/GBP is trying to exit the corrective downward trend channel since mid-June..
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
Sunset Monday, July 24, 2023 Daily Market Overview Click here to read the PDF-version of this report. Markets • The July European PMIs painted a bleak picture of the economy. They also all missed expectations. The composite indicator Read more…
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