• The July European PMIs painted a bleak picture of the economy. They also all missed expectations. The composite indicator ventured deeper into contraction territory (48.9 from 49.9). Manufacturing is still leading the decline (42.7 from 43.4) with net job losses for a second month straight, a steepening loss of new orders (one of the steepest since 2009) and output at its lowest in 38 months. But cracks start to show in services as well as activity printed at a six-month low of 51.1 (from 52.0). Order inflow posted its first downturn in seven months, causing backlogs to fall for the first time in half a year too as companies try to keep the services engine going. Employment still rises though at the slowest pace since March. The private sector year-ahead outlook was the most meagre since November last year. Prices pressures meanwhile moderated further in July. Lower manufacturing input prices fed through to lower selling prices, which fell for a third successive month and at the sharpest pace since September 2009. In services, upward wage pressures keep input costs above the long-run average, causing prices charged to continue to increase too. That’s keeping the pressure on the ECB to tighten further, even as the pace in both input costs and prices charged slowed further. UK PMI’s were strikingly alike though in terms of absolute levels it is a little less gloomy. The manufacturing downturn deepened (45 from 46.5) and services printed quite a setback (from 53.7 to 51.5), making the whole private economy grow only very marginally (50.7 from 52.8).
• The market reaction was a straightforward one. Core bonds rallied, with German Bunds outperforming USTs. Yields in Germany eased 3.8-6.8 bps, the front taking the biggest hit. The 2-y yield struggles to retain the symbolic 3% level. US yields shed 2.3-2.8 bps at the belly and yields in Great Britain drop 5-6.1 bps. UK money markets become increasingly less convinced of a BoE policy rate at 6%, giving it only a 20% chance currently. The euro suffers. EUR/USD hit an intraday low of 1.1066, before recovering some of the losses to trade at 1.1082 currently. The 1.1095 support is extensively being tested. Sterling isn’t in the best shape either following the PMIs but still manages to eke out a gain vs the euro. EUR/GPB eases to 0.864. The Japanese yen profits from easing core bond yields and a risk-off equity environment (EuroStoxx50 -0.5%), even as Bloomberg cited more “people familiar with the matter” that BoJ officials are not convinced (yet) that the current bout of inflation, which will probably result in a sharp upward revision for this fiscal year’s forecast, is sustainable. USD/JPY drops towards 141.01, EUR/JPY erases much of last Friday’s surge to change hands at 156.34.
News & Views
• Contrary to the EMU and the UK, sentiment indicators in the Czech Republic and in Hungary painted a slightly different picture. According to the Czech Statistical Office, overall confidence in the Czech economy in July improved 1.1 points to 91.4. The business indicator rose a limited 0.1 pts to 91.1 while the improvement in the consumer confidence indicator was more outspoken with 5.9 points to 92.7. After a two-month decline, confidence in the economy increased in industry (+2.9) and trade (+1.7) but decreased in selected services (-2.5) and in construction (-4.2). Consumer confidence also increased m/m. The number of respondents expecting a deterioration of the overall economic situation in the Czech Republic in the next twelve months decreased. Households were also slightly less worried about their financial situation in the next twelve months. The relative improvement in Czech sentiment compared to EMU doesn’t stop the recent correction of the koruna against the euro. EUR/CZK rose further to 24.17. In the wake of recent softer CPI, Czech National Bank vice governor Zamrazilova last week also openly indicated that the debate on rate cuts has started. At the same she saw a possibility of the koruna weakening more than what was put forward in the latest CNB forecast. GKI economic sentiment in Hungary also improved in July to -17.5 from -20.4 in June. The improvement remains modest but suggest a stabilization after reaching a post-pandemic low of -23.1 in October last year. Business confidence improved to -8.5 from -11.8. Consumer confidence rose only marginally from -44.8 to -43.2. The National Bank of Hungary will decide on monetary policy tomorrow. The Hungarian forint today gains modestly with EUR/HUF holding below the EUR/HUF 380 barrier (EUR/HUF 378.6 currently). The MNB over the previous meeting gradually reduced its overnight emergency rate in two steps to from 18.00% to 16.00%. Another 100 bps cut is expected tomorrow.