manufacturing

Summary:  Market sentiment continued to deteriorate late last week on geopolitical concerns and despite the Bank of England’s intervention helping to at least temporarily stabilize global sovereign bond markets after their aggravated slide of late. The week ahead features a busy economic calendar from the US, capped by Friday’s September jobs report as markets wonder whether the US labor market will allow the Fed any chance to change its hawkish tune.   What is our trading focus? Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) S&P 500 futures pushed below the 3,600 level this morning, which is obviously a major level to watch and indicates that the equity market is still facing headwinds. The latest risk sources adding to the negative sentiment are talks about Credit Suisse and their financial strength, and then macro indicators in Asia continuing to weaken against estimates. On a positive note, the US 10-year yield has stabilised around the 3.75% level which is critical for stabilisation in the equity market. Our medium-term outlook continues to be negative on equities driven by higher rates for longer and structurally higher inflation being priced in by the market over time. USD and risk sentiment The US dollar found support as US treasury yields bottomed out and recovered on Friday. An interesting test for the USD here if treasury yields continue to churn sideways or lower and yet risk sentiment remains on the defensive. Is the USD still a safe haven without the constant turning of the screws from treasury yields that have been a key factor in the huge upswing in the greenback this year? Key levels for the USD include the 145.00 area tested overnight in USDJPY (the Bank of Japan intervened above this level previously) for resistance and 0.9900 resistance/USD support in EURUSD. A busy data week for the US this week as well – a strong September jobs report on Friday could continue to support the dollar. GBPUSD and EURGBP after climactic week Sterling made a bid at a full reversal of its enormous slide last week, but the jury is still out on whether the currency has put in a major low A major sentiment shift to the upside might require the Truss government to go or at least to roll back some of the measures that helped to trigger the currency’s slide (although pension fund hedging was a significant factor in the lock-up in the UK’s gilt market that brought both the chaotic slide and the Bank of England’s emergency response.) EURGBP focus on the 0.8700-0.8750 area that was the former top of the longer term range, and GBPUSD focus on 1.1200-1.1250 if sterling continues to attempt a recovery. The Bank of England is priced to hike 122 bps at its November 3 meeting, down from over 150 bps at times last week. Gold (XAUUSD) Gold holds above Friday’s low at $1660, supported by geopolitical and financial risks and a cooling of the recent dollar and yield surge. At this stage the main buyer is likely to be money managers reducing short bets on COMEX gold. In the week to September 27, the net short held by these speculators jumped 25% to a near four-year high. Focus now being the critical resistance zone into 1,678-1,690 that is the departure point for this latest bear market move. Crude oil (CLX2 & LCOX2) Crude oil trades higher ahead of Wednesday’s OPEC+ meeting in Vienna as the alliance is considering a production cut of more than 1 million barrels to support prices following a 25% slump during Q3-22. Both WTI and Brent, however, trade up by less than 3% with the decision by no means final while the impact of such a move would be smaller than the headline number suggests as several producers, including Russia, produces below their target. Relative to the current quotas, only a handful of producers led by Saudi Arabia would be able to deliver the cuts without losing additional market share relative to the quota system in place. In addition, the group also need to consider the impact of a Russian embargo starting in December and the US pausing its sales from Strategic Reserves as well as the Biden administration asking gasoline producers to curb overseas sales. Weighing on prices are the potential for more fuel exports from China after it issued its biggest fuel-export quota for this and potentially the next quarter. US treasuries (TLT, IEF) US treasury yields rebounded from local lows for the week on Friday, suggesting that very weak risk sentiment elsewhere is not yet seeing significant interest in treasuries as a safe haven – although at least rising yields aren’t the primary driver of weak risk sentiment at the moment. The upside focus remains to on the 4.00% area highs for the US 10-year treasury yield benchmark from last week and to the downside on the 3.50% prior high from June. Important macro data points from the US include the ISM surveys today and Wednesday and the Friday US September jobs report. What is going on? Hot US PCE paves the way for another CPI surprise this month US PCE data came in stronger-than-expected, with the headline up 6.2% YoY from 6.3% YoY prior and 6.0% YoY expected. The core measure was at 4.9% YoY, coming in both higher than last month’s 4.6% YoY and the expected 4.7% YoY. This will likely push up the pricing of another 75bps rate hike from the Fed at the November meeting, as the CPI report out this month is generally likely to follow the same trend of remining close to its highs. Meanwhile, the final estimate of University of Michigan survey was revised lower to 58.6 from preliminary print of 59.5 due to the slide in expectations to 58 from 59.9, even as the current conditions fared better at 59.7 from 58.9 previously. The inflation metrics also diverged with 1yr consumer inflation expectations edging higher to 4.7% (prev. 4.6%), although the longer term 5yr slightly fell to 2.7% (prev. 2.8%). Credit Suisse credit in focus The FRA-OIS spread is rising rapidly indicating that the risk priced by the market in the overall banking sector is deteriorating and thus the banking sector is in focus by investors this week. Tesla Q3 deliveries miss estimates The EV-maker reports 343,830 cars delivered in Q3 against estimates of 358,000 which the EV-maker says is due to logistical obstacles, but other consumer companies have faced headwinds due to elevated energy costs so it would be natural to expect Tesla’s delivery figures being hit by the current cost-of-living and energy crisis. Eurozone inflation remains painfully high The September Eurozone consumer price index (CPI) reached double-digits at 10 % year-over-year versus prior 9.1 % and expected 9.7 %. The core CPI (excluding volatile components) is up to 4.8 % year-over-year versus expected 4.7 %. What is clearly worrying is the acceleration in price pressures beyond energy and food prices. This is a signal that inflation is now broad-based. In France, the EU-harmonized CPI was out at 6.2 % year-over-year in September. This is much lower than what the consensus expected (6.7 %). It stood at 6.8 % in July and 6.6 % in August. On the downside, the producer price index (PPI) for August reached a new high at 29.5 % year-over-year against expected 27.6 %. This matters. The PPI usually represents the pipeline in inflation which will be passed on to consumers, at least partially. This means that the peak in inflation is likely ahead of us in France and in all the other Eurozone countries. Expect to reach it in the first quarter of next year, at best. Norway set to purchase record amounts of foreign currency On Friday, the Norges Bank said it would raise the level of daily foreign FX purchases to $400 million in October as it transfers revenues from its energy exports into the enormous sovereign wealth fund. NOK sold off sharply on the news on Friday, with EURNOK rising to a new high for 2022 above 10.60. Election in Brazil headed to October 30 run-off The former left-populist president Lula polled strongly at 48%, but not over the 50% margin required to avoid a run-off. Incumbent president Jair Bolsonaro received 43% of the vote. Observers are watching the election with some level of unease on fears of election interference or lack of acceptance of the results from Bolsonaro. USDBRL trades near the highs since January, just below 5.50. Wheat jumps after US production disappoints On Friday, the USDA published its Quarterly Stocks and wheat production reports, and the result drove Corn (ZCZ2) higher after the stocks came in lower than analysts had forecast while soybean slumped in response to higher-than-expected stocks. December wheat (ZWZ2) jumped 2.8% with stocks in line but production in all categories falling short of expectations, reducing all wheat production levels to 1650 million bushels, some 8% below expectations. Meanwhile, geopolitical concerns are on the rise with Russia threatening use of low-yield nuclear weapons as its military advantage starts to diminish. This has again raised concerns over the fate of the Black Sea export corridor and the supply situation in agriculture commodities may continue to be challenged. Gazprom cuts gas supplies to Italy Just days after the NordStream pipelines blew up, Gazprom announced it was halting supplies to Italy via Austria due to a contractual dispute. Last week the newly elected Italian PM said she stood with Ukraine. While flows through Ukraine, the only remaining major pipeline bringing gas straight to Europe is operating as normal, it highlights an increased risk that Russia eventually may cut all of its supply. A situation the European market should be able to cope with given the current level of stocks and increased flows from Norway and LNG. Italy meanwhile has already sourced sufficient alternative supplies of gas from North Africa to make up for any shortfalls this winter if Russia were to cut off supplies. China relaxes mortgage rates’ lower bound for first-time homebuyers The People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) announced last Friday to lower or even remove the lower bounds imposed on first-time homebuyers in cities that experienced three consecutive months (from June to August 2022) declines in new home prices both sequentially and y/y. The currently lower bound is the 5-year Loan Prime Rate minus 20bps.  The new policy will benefit first-time homebuyers in lower-tier cities while tier-1 cities do not meet the above price decline criterion. Among the top-70 cities, eight Tier-2 cities and 15 Tier-3 cities are eligible. The PBoC and the CBIRC also reportedly told the largest banks in the country to extend at least RMB600 billion in net new financing to the housing sector for the rest of the year. What are we watching next? US ISM manufacturing on tap today Due later today, 7ISM manufacturing is unlikely to dent the optimism around the US economy that has been building up further with positive economic indicators released over the last few weeks. While the Bloomberg consensus estimates show some signs of a slowdown to 52.1 in September from 52.8 in August – that should likely be underpinned by improving supply chains, while new orders should remain upbeat. Australia’s RBA to announce latest hike tonight The market is leaning for a 50 basis point move that would take the rate to 2.85%, though a strong minority are looking for a smaller move as Governor Lowe had previously signalled that the pace of rate hikes is likely to slow from here after four consecutive rate hikes of the magnitude of 50bps. The RBA is seen as not wanting to clamp down on financial conditions. A significant risk for the Australia economy is that 60% of mortgages in the country are based on floating rates, with the short yield in Australia now at the highest level in over a decade, when they were close to record lows just over a year ago. On Tuesday, Japan’s Tokyo CPI will see impact of reopening Japan’s inflationary pressures are likely to continue to surge amid higher global prices of food and electricity, as well as on the weak yen propping up import prices. Bloomberg consensus estimates point to a slightly softer headline print of 2.7% YoY from 2.9% YoY previously, but the core is pinned higher at 2.8% YoY from 2.6% YoY previously. Further, the reopening of the economic from the pandemic curbs likely means demand side pressures are also broadening, and services inflation will potentially pick up as well. UK government on the rocks? After recent polls suggest that the Conservative party has its weakest popular support since the 1990’s, the Truss government is in a fight for its very survival. A Conservative Party conference is ongoing and will end on Wednesday with a closing speech from PM Truss. Chancellor Kwarteng, meanwhile, has been out battling to defend his policy moves, but breaking news this morning suggests that the government may be set to reverse its move to cut taxes for the highest earners. We should get some clarity on that today with a speech from Kwarteng. The only glue holding the fractious Conservative party together is the knowledge that early elections (not required until early 2025) would see the party losing power for the first time since 2010. Earnings to watch The earnings season officially starts next week with the first group of US financials reporting but in the meantime a few earnings are worth watching this week. Biogen reports Q3 earnings (ending 30 September) tomorrow with analysts expecting revenue growth of -11% y/y and EBITDA at $847mn down from $959mn a year ago. While the current financial performance of Biogen is volatile and weak the recent news about its breakthrough in Alzheimer’s with a drug that can slow down the disease is what analysts will focus on in terms of gauging the outlook. On Wednesday, Tesco is in focus as the UK largest grocery retailer is at the center of the current food inflation and insights from Tesco will be valuable from a macro point of view. Tuesday: Biogen Wednesday: Keurig Dr Pepper, Aeon, Lamb Weston, Tesco, RPM International Thursday: Seven & I, Conagra Brands, Constellation Brands, McCormick & Co Economic calendar highlights for today (times GMT) 0630 – Switzerland Sep. CPI 0715-0800 – Eurozone Sep. Manufacturing PMI 1330 – Canada Sep. Manufacturing PMI 1345 – US Sep. Final S&P Global Manufacturing PMI 1400 – US Sep. ISM Manufacturing 1910 – US Fed’s Williams (Voter) to speak 2330 – Japan Sep. Tokyo CPI 0330 – Australia RBA Rate Announcement  Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: Apple  Spotify PodBean Sticher   Source: https://www.home.saxo/content/articles/macro/market-quick-take-oct-3-2022-03102022

The strong August reading does not fully reverse the losses from July, and expectations for manufacturing in the months ahead continue to weaken. Still, for the ECB this is another argument not to pivot towards a more dovish stance in the short run   Industrial production increased by 1.5% in August after a -2.3% drop in July. This was much better than expected but still does not erase losses from July. Ireland is experiencing very volatile production at the moment, which is affecting total eurozone numbers, but among the large industrial economies we see similar – though more muted – moves. France, Italy and Spain all experienced decent to strong growth in August, while Germany remained the exception with another month-on-month loss in production. This is the third consecutive month of declines in German production. Industrial production is generally volatile from month to month and therefore we do not think this is to be taken as the start of a recovery. All survey data and anecdotal evidence point toward a more significant slump ahead as demand is weakening and high energy costs are forcing businesses to slow production or stop it altogether in certain energy-intensive sectors. The upside risk to that view comes from improving supply chains, which could unlock some backlogs of production. Still, our base case is for the manufacturing sector to contract in the months ahead. Overall, while the outlook for production is weakening, this data in itself is no reason for the ECB to change tack in terms of its rate hike strategy. For a dovish pivot, the ECB would need to see evidence that the economy is contracting quickly. While a quarterly contraction in manufacturing is definitely a possibility, these August data are far from alarming. A 75bp hike in October is therefore very much on the table at the moment. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Today there are no major economic events than the result of the US CPI report. In addition, there will be important speeches by members of the FOMC and other central banks, including the Bank of England of Canada. RICS House Price Balance The Royal Institution of Chartered Surveyors (RICS) House Price Balance was published early in the day. The result showed that the index fell sharply below zero. The current reading is at -2%. A drop from 30% to 20% was forecast, but the current figure has turned out to be more drastic. This means that house prices in the designated area have dropped drastically. There has been a decline in prices since May, and the present one signifies a significant deepening of this trend. The first speeches The first speech of the day took place at 2:45 CET. The speaker was Michele Bullock serves as an Assistant Governor of the Reserve Bank of Australia (RBA). The next speech was from America. Fed member Christopher J. Waller spoke at 9:00 CET More speeches Ahead Today also representatives of European banks will take the floor. Andrea Maechler serves as Governing Board Member of the Swiss National Bank (SNB) is set to speak at 14:30 CET. At the same time will be speak Andrea Enria, Chair of Supervisory Board of the European Central Bank. Speech by representatives of the Bank of England is scheduled for 15:00 CET and 15:10 CET. Speakers in turn: David Ramsden, Deputy Governor of the Bank of England and Silvana Tenreyro, a member of the Monetary Policy Committee (MPC). Another Fed speech and one from the Bank of Canada are also planned. Bank of Canada Member Governor Tiff Macklem will speak at 6:50 PM CET. After the published reports, the following will speak: Federal Reserve Bank of Philadelphia President Patrick Harker, Federal Open Market Committee (FOMC) Member Mester and Federal Reserve Bank of Kansas City President Esther George. All speeches can provide valuable information about the future of monetary policy actions of the banks concerned. ECB Economic Bulletin At 11:00 CET the ECB published a Bulletin. The Economic Bulletin provides a comprehensive analysis of economic and monetary developments and interim updates on key indicators. Which can help investors to assess the future development of this region, as well as summarize the effectiveness of ECB's work South Africa Manufacturing Production Today, South Africa will also publish a report on Manufacturing Production. The shift from Y / Y of output produced by manufacturers is forecast to decline from 1.4% to -2.4%. A smaller index in this sector may indicate serious problems which the country's economy is struggling with, which will hinder the growth. Brazil CPI Brazil as well as the United States will publish inflation data. In South America's largest economy, Y/Y inflation is expected to decline from 7.17% to 6.34%. It is very likely as the CPI has been in a downward trend since July. Meanwhile, the CPI m/m is expected to increase from -0.29% to 0.48%. US CPI Expectations for US inflation are positive. Slightly dropping is expected. Read more: Inflation In The USA Has A Chance Of Cooler| FXMAG.COM Initial Jobless Claims The number of individuals who filed for unemployment insurance for the first time during the past week is expected to increase by 3K weekly report. The last reading was at 217K and it was a positive reading as the level persisted for another week and the forecasts will increase to 220K. At 15:30 CET it will turn out if the reading is positive this time. Summary: 2:01 CET RICS House Price Balance 2:45 CET South Africa Assist Gov Bullock Speaks 9:00 CET Fed Waller Speaks 11:00 CET ECB Economic Bulletin 13:00 CET RPA Manufacturing Production 14:00 CET Brazil CPI 14:30 CET SNB Gov Board Member Maechler Speaks 14:30 CET ECB's Enria Speaks 15:00 CET MPC Member Ramsden Speaks 15:10 CET MPC Member Tenreyro Speaks 15:30 CET US CPI 15:30 CET Initial Jobless Claims 16:00 CET FOMC Member Harker Speaks 18:50 CET BoC Gov Macklem Speaks 19:30 CET FOMC Member Mester Speaks 20:30 CET FOMC Member George Speaks Source: https://www.investing.com/economic-calendar/

Coming on the back of the weakness in retail sales, the steep drop in industrial production and news of more job lay-offs adds to fears the US could already be in recession. This is the third consecutive month of contraction in industrial activity with output declines looking broad-based  Industrial production experienced its third consecutive monthly contraction in December Manufacturing falls add to the gloom on the US economy Industrial production adds to the gloom surrounding the US economy, missing expectations by quite a margin and posting its third consecutive monthly contraction in output. Total output fell 0.7% month-on-month in December (the market consensus was -0.1%) while November is now reported as a 0.6% contraction after initially being reported as a 0.2% decline. Manufacturing is responsible for most of the weakness with output falling 1.3% in December after a 1.1% drop in November (that was initially reported as a 0.6% fall). All the main sub-components fell with motor vehicles/parts down 1%, machinery down 3.4% and computer/electronics dropping 1%. Mining fell 0.9% MoM, possibly reflecting weaker oil and gas prices, which may have disincentivized some drilling. Bad weather may also have had an impact, but cold temperatures certainly boosted utilities. Output rose 3.8% with natural gas demand surging 8.2% on strong demand for heating. Levels of US industrial output by sector Source: Macrobond, ING   Coming on the back of such a poor retail sales report it reinforces the message that recession is on its way and we could in fact already be in it. The Conference Board’s measure of CEO confidence is at its lowest level since the Global Financial Crisis and this means companies are going to increasingly adopt defensive strategies so the strong jobs numbers – pretty much the only decent set of numbers right now – cannot continue in this environment. Note Microsoft's announcement of 10,000 job losses this morning (nearly 5% of its workforce) – remember jobs are always the last thing to turn in a cycle given labour data is such a lagging indicator. More bad news will be coming in the months ahead with the Federal Reserve likely to reverse its rate hikes from late third quarter 2023 onwards. Read this article on THINK TagsUtilities US Recession Manufacturing Industrial production Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

In 2023, many EU sectors will see diminishing growth due to a weak economy. Manufacturing, staffing and construction are likely to face a small decline though not all sectors will shrink. While the Technology, Media & Telecom (TMT) and transport sectors should see lower growth than last year, the outlook remains positive Robotic arms operate in a welding hall of the Suzuki manufacturing plant in Hungary Sluggish developments in many industries Development production (volume value added) EU sectors (Index 2018=100) Source: Eurostat, ING Research (2022 Estimate & 2023 Forecast) Energy prices still a drag but gas and power markets have eased Given the circumstances, European companies could not have hoped for a better situation during the first half of the heating season. Demand destruction, milder-than-usual weather and continued LNG supply have ensured that storage levels are still at record-high levels. Day-ahead TTF gas prices have fallen as much as 83% from the peak in August 2022 and APX power prices by 75%. This leaves Europe in a better-than-expected position for the remainder of this winter and the same is true for the 2023 filling season of gas storages. However, it is still vital that the region is cautious through the remainder of this winter, as Europe needs to try to end the current heating season with storage as high as possible as gas flows from Russia could still be reduced further, both in terms of pipeline flows and LNG shipments. Futures markets currently expect TTF gas prices to trade between 55 and 65 euro/MWh throughout 2023 and carbon prices to remain within their trading band of 75 to 100 euro per ton CO2. Hence, markets currently expect APX baseload power prices to trade between 140 and 175 euro/MWh throughout 2023. That is a lot lower compared to the future prices before the start of the winter, but still three to four times higher than pre-crisis levels. Hence, energy prices will continue to weigh on European sectors in 2023. European gas storage levels are at record high levels EU gas storage levels Source: ING Research based on Refinitiv and Gas Infrastructure Europe Manufacturing: Still cloudy, but gradually clearing up In recent months, the outlook for European industry has improved somewhat thanks to a mild winter and governments bolstering producer confidence by dampening the extreme energy prices. Given the fact that the sector has encountered a growing number of persistent problems, production held up well in 2022. Average growth was around 2%, but sectoral differences were large, ranging from sharp contractions in energy-sensitive basic materials such as chemicals (-5.5%) and base metals (-3.5%), to strong growth in consumer goods such as pharmaceuticals (+14%) and clothing (+5%). Production interruptions have been greatly reduced, but like the high energy prices, are not yet a thing of the past. In addition, a post-Covid consumption shift from products to services and stagnation in the US will most likely continue to weigh on demand in the first half of 2023. The reopening of the economy in China provides some counterweight on the demand side. Manufacturers’ expectations for the near future have become less pessimistic. In addition, automakers clearly continue to benefit from the more reliable supply of semiconductors and other electronic components, which is enabling them to eliminate the large production backlogs. In that respect, it is also encouraging that the Ifo index, Germany's most prominent indicator, rose for the fourth time in a row in January. Still, don’t expect a full-blown industrial upswing in 2023. The more bearish factors dominate for now, and some renewed but subdued growth in the second half of 2023 seems the most realistic scenario. Food manufacturing: Slight decline after two years of strong growth Growth in production volumes in food manufacturing has been particularly strong over the last two years, partially because of a Covid rebound. Over the past 20 years, there are three periods in which production volumes decreased in line with a general economic downturn, namely 2008-‘09, 2012-‘13 and 2020. We believe 2023 could mark a decline in the range of 0.5% to 1% for food makers as the general economy balances between contraction and stagnation. While the inflation peak seems to have passed, there are still many food manufacturers that plan to raise sales prices in the months ahead. However, since December, this group is no longer in the majority. Food inflation came in at 12.2% in 2022 which has likely caused shifts in consumer demand as more households look to save money when shopping for groceries or eating out. For food producers, this could mean that companies that primarily focus on making private-label products and supplying discounters fare a bit better in terms of sales volumes compared to branded food makers. Still, the latter have more pricing power in general and are in a better position to defend margins. Construction: Order books still well-filled In November 2022, EU construction production decreased a bit (-0.4%) compared to October but was still above the volume of a year earlier. Higher interest rates and a weaker economy are making home buyers and firms more reluctant to invest in new residential and non-residential buildings. In addition, higher building material costs have made new investments more expensive although some building materials prices have decreased in the last few months. That said, EU construction firm order books are still well filled with 9.0 months of ensured works at the beginning of 2023. The EU construction confidence indicator declined in the first half of 2022, but since then, has hovered around neutral. So, the developments are certainly not bad in every subsector. High energy prices are creating additional demand for energy-saving construction works in the installation and maintenance market. All in all, we expect only a very slight decrease (-0.5%) in total EU construction volumes in 2023. Increase in sentiment indicator retail and manufacturing sector in January 2023 European Union Sentiment indicators Source: Eurostat, ING Research Retail: Weak start to the year but some recovery expected 2023 is likely to be another interesting year for retail. Last year saw people spend more money than ever at the store and online, although volumes have been on a declining trend since late 2021. This is a clear sign that consumers are suffering from high prices. We also note that pre-pandemic preferences are now returning with consumers once again spending more on services and less on goods. Slowing volumes and easing supply chain problems have led to fast growth in inventories, which could prove problematic early in the year given that consumers are becoming more cautious about spending on goods. The big question mark is how purchasing power will recover over the course of the year as inflation is expected to drop. Wage growth is set to increase, but not to the extent that purchasing power will improve in the first half of the year. Still, with unemployment expected to remain low, there seems to be potential for recovery in sales volumes in the second half of the year. TMT: Growth will slow but remain strong We estimate that growth in the information and communication sector was 5.8% in 2022 and we forecast 3.5% growth for 2023. This is a composite figure that reflects growth above 3.5% in the sub-sector “Computer programming, consultancy, and information service activities”, while growth should be more subdued in the telecom sub-sector. Our expected growth for the information and communication sector is below the historic average, in line with the expected economic slowdown. The sector has been growing much faster than the overall economy over the years. According to European Commission survey data, managers of the largest subsectors of the information and communication sector have a neutral view about the near-term business prospects. They do not think that there are specific factors which will restrain growth, although some managers report it is a challenge to find personnel. Interestingly, the sector is experiencing a lot of price pressure, which is favourable for customers. Nominal growth will therefore be more subdued than volume growth in 2023. Read next: Samsung Demand For Semiconductors And Smartphones Remains Weak| FXMAG.COM Transport & Logistics: Rebound of passenger travel outweighs headwinds for freight The European transport and logistics sector is entering a new phase of reality after the unprecedented impact from the pandemic and the Russian invasion of Ukraine. Unlike 2022, this year starts with (nearly) all travel restrictions removed. With European interest in (leisure) travel continuing to resume, the aviation sector is set to proceed on a low double-digit recovery track. Public transport networks are also expected to see higher occupancy rates. On the dominant freight side, the outlook is bleaker, with consumers spending more on services and demand for goods faltering amidst economic weakness and sanctions. German road transport traffic on motorways – a relevant indicator - ended last year in slight negative territory. But freight logistics could pick up over the course of the year as the European manufacturing sector shows signs of improvement, and China’s Covid policy U-turn could benefit airlines as well as trade (and the ports- and shipping sector). On balance, we expect the transport and logistics sector to grow by 1.5% in 2023. Staffing: Hiring freezes seen due to EU recession fears After two years of buoyant market growth, the outlook for the European staffing sector is darkening for 2023. With economic activity in most European economies expected to slow down, market volumes in the European Union are likely to decline by 1% in 2023. A combination of lower economic growth forecasts and rising costs will likely soften demand for temporary agency workers, especially in certain energy-intensive and/or consumer-oriented industries. Although unemployment will rise slightly, the labour market remains tight in most European economies. Hence, clients are more likely to turn to temp agencies since they are better equipped to find candidates than the clients themselves. However, at the same time, the tight labour market will limit the growth potential of temporary employment agencies, as it becomes more difficult for them to recruit new employees. Read this article on THINK TagsTransport TMT Manufacturing Forecasts Food EU Construction Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Why small-cap industrials companies may be poised to benefit from moving supply chains closer to home—thoughts from Christopher Meeker of Franklin Mutual Series. Manufacturing accounts for 8% of US employment, 20% of capital investment and 35% of annual US productivity growth.1 With all the influence this industry has on the US economy, we believe there could be significant positive effects for small-capitalization (small-cap) industrials and materials stocks if more US companies bring their manufacturing efforts back to the United States. In our opinion, this area of the equity market allows for targeted investments in companies that stand to benefit from an increase in onshore manufacturing. YIMBY (yes, in my back yard) Central-bank actions to tame inflation have been affecting economic growth globally. Gross domestic product (GDP) readings have waned in many regions, and consumers have been pulling back on spending as prices have climbed. In China and throughout Europe, the manufacturing sector has been softening as well. However, within the United States, manufacturing output has fared slightly better, remaining in expansion territory January through October of 2022. In addition, many areas of the US economy have shown relative strength. With this in mind, we think the US economy currently offers the most economic promise for the manufacturing sector. Read next: Eurozone inflation: We believe the issue's roots were building up before the war, and some are saying it was groundwork set by the ECB| FXMAG.COM A trend toward US-based manufacturing may be materializing, as we have seen new semiconductor fabrication plant construction and exponential increases in manufacturing construction spending data. Projects supporting growth for semiconductor fabrication, electric vehicle and battery plants, data centers and warehouse/distribution centers now account for approximately 65% of industrial construction starts.2 In addition, recent US legislative measures are incentivizing activities that may increase demand for construction materials and equipment. After pandemic-era supply chain disruption, a desire to improve sourcing and logistics is influencing corporate capital expenditure decisions as well, with money directed toward supply chain fortification. Specifically, we think construction equipment rental and storage companies, cement and aggregate businesses, rebar producers and similar companies may receive the largest effect. We think small-cap companies are good tools for investing in specific areas of the market that may experience a demand tailwind from these manufacturing-related trends. Small-cap companies tend to be more sensitive to US economic growth than their large-cap counterparts, due in part to their domestic client base. For example, small-cap US building products companies generate 90% of their revenue from clients located within the United States, whereas large-cap companies generate 67% of their revenue from domestic clientele.3 So, all else equal, a revenue bump from increased local demand typically moves the needle more for a small-cap company than a large one. The other side of the coin is that small companies are also comparatively insulated from economic headwinds generated outside the United States than their large-cap counterparts, in our opinion.   Exhibit 1: US Small- and Large-Cap Companies, US and Non-US Revenue Base Revenue Share of Companies in Russell IndexesAs of December 20, 2022 Sources: FactSet, Russell Investment Group as of December 20, 2022. The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 1000® Value Index measures the performance of the large- cap value segment of the US equity universe.  Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results. Incentivization nation Recent federal stimulus programs are aimed at encouraging investment in US infrastructure, including incentives for reshoring US supply chains. These programs include the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA) and the CHIPS (Creating Helpful Incentives to Produce Semiconductors) and Science Act. We see this legislation as positive for small-cap value stocks, as they are designed to stoke demand across various aspects of the supply chain and incentivize a multitude of projects. The IIJA has set aside US$550 billion for spending on various forms of infrastructure such as new roads, highway improvements, bridges and mass transit systems. More spending on highways can mean increased demand for cement, steel, asphalt and other aggregates, in addition to machinery and construction rentals. The IRA creates multiple improvements to the US’ clean energy practices, electronic vehicle manufacturing, battery cell manufacturing and HVAC system electrification. This means demand should increase for metals such as copper, as well as places to assemble electric vehicles and batteries, which require building materials to erect. The US$78 billion in manufacturing subsidies the CHIPS and Science Act offers could also have far-reaching effects. Each semiconductor plant built as a result of the Act not only improves the ability of goods makers to access semiconductors, but also requires its own input of cement and aggregates, rebar, construction equipment, copper wire and construction site rentals, all generating potential demand for products from companies in the small-cap value investable universe. Bring it home Sourcing difficulties during COVID-19 taught companies the benefits of having a more regionalized supply chain. In addition to benefiting from government incentives, companies may see fewer logistical complications and costs due to shorter shipping routes and increased inventory stability that can come from a local workforce producing components in local factories. Several US-based companies have already announced or broken ground on new semiconductor production facilities located stateside, such as semiconductor companies GlobalFoundries, Intel and Texas Instruments. In early October, Micron Technology announced plans to build the largest semiconductor fabrication plant in US history in upstate New York. Micron estimates it will spend more than US$100 billion on the facility over the next couple of decades. In addition, we have observed data points which we think support a trend toward reshoring. For example, US manufacturing employment has surpassed pre-pandemic levels. This is the first time since 2000 that the sector has reclaimed the jobs lost in an economic downturn. Exhibit 2: US Manufacturing Employment Trends US Nonfarm Payroll Employment: ManufacturingJanuary 1991–November 30, 2022 Source: US Bureau of Labor Statistics, data as of November 30, 2022. Also, we’ve analyzed data from the US Census Bureau’s Construction Put in Place monthly report to see if there is corroborating evidence to the rebounding manufacturing employment levels. While broader manufacturing industry construction spending remains below prior peak levels, the computer, electronic and electrical manufacturing sub-category has not only rebounded sharply since 2021, it’s at the highest real-dollar level since 2005. We believe this suggests the United States is seeing some reshoring for higher value-added products. According to one estimate, an effective reshoring of the US manufacturing sector could boost US GDP by US$185 billion by 2030.4 That’s quite the upswing, and a lot of increased demand for products and services that economically sensitive small-cap industrials and materials companies could potentially meet. Endnotes Source: McKinsey Global Institute. Source: Dodge Construction, KeyBanc Capital Markets Inc., as of October 31, 2022. Source: FactSet, Russell Investment Group as of December 20, 2022. Source: IHS Markit (January 2021 forecast); OECD; McKinsey Global Institute analysis.   WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Value securities may not increase in price as anticipated or may decline further in value. Investments in foreign securities involve special risks including currency fluctuations, economic instability, and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Weak Chinese manufacturing data put pressure on the single currency as Europe, particularly Germany, is highly correlated with China.   However, the Eurozone's data is not so bad today. The number of unemployed in Germany rose by 9K, down from 23K and 19K in the previous two months. Unemployment is rising much more slowly than in the recessions of 2009 and 2020, and the unemployment rate (5.6%) is low by historical standards.   Second estimates confirmed a 0.2% q/q and 0.9% y/y rise in French GDP in the first quarter, although private consumption fell by a further 1% in April after a 0.8% decline in the previous two months.   For Italy, the final data pointed to economic growth of 0.6% q/q and 1.9% y/y, 0.1 percentage points higher than previously estimated.   Despite the upbeat economic data, the EURUSD fell to 1.0660 in early European trading, its lowest level since 17 March.

The official services and manufacturing PMIs were much weaker than expected, adding to the move into defensive assets on concerns over China's economy.   The Manufacturing PMI fell from 49.2 to 48.8 instead of the expected 49.5. Readings below 50 indicate a contraction in activity during the month. Excluding periods of contraction due to lockdowns, this is the lowest level for the index in at least 13 years. Prices were the main driver of the decline, but falling order books and inadequate market demand were equally worrying.   The Services PMI fell from 56.4 to 54.5, below the expected 55.1. While these levels are below expectations, they align with the historical norm we saw before the coronavirus.   The weak data triggered a fresh sell-off in the renminbi. The USDCNH pair was above 7.12 at the start of European trading, its highest level since November last year. Over the past three weeks, the pair has hit new highs almost daily. Unlike in March and December, the central bank has not prevented the renminbi from weakening around the 7.0 level.   A weaker local currency benefits exporters as it increases their global competitiveness. The main side effect is higher inflation. But this is fine for China, where the CPI fell to 0.1% y/y in April, and the PPI lost 3.6% y/y. Perhaps all these effects are what the People's Bank is trying to achieve.   The weak economy, low inflation and the central bank's apparent resistance to the Renminbi weakness suggest that the USDCNH pair will continue looking for a top. The closest landmark is the 2019 and 2020 highs at 7.19, which the pair can reach relatively orderly within a few weeks and maintain the current momentum. However, one should be prepared that the recent move will be exhausted before the renminbi weakens to 7.3 per dollar, approaching last October's highs.  

It is in the UK that the local swap curve is diverging most from the central bank’s message. Swap currently imply another 100bp of tightening will be implemented before year-end. We do not disagree that core inflation has been disappointingly slow to decline in the UK but betting on another four 25bp hikes this year requires a strong opinion on inflation dynamics which we think few in the market actually have.   This means current pricing is unlikely to be maintained. Markets should also be on alert for a pushback by Bank of England (BoE) officials against market pricing. Only Catherine Mann is due to speak today. As the more hawkish member, she is the least likely to disagree with elevated rates but her pushback would be all the more potent.   Forward EUR rates have been relatively immune to the recent re-pricing higher in USD and GBP rates   Today's events and market view Chinese PMIs released today missed expectations on both manufacturing and services, although the latter remains at a healthy level above the 50 expansion/contraction line.   French, Germany, and Italian CPIs for the month of May will be released today. In addition to yesterday’s Spanish prints, this means over 70% of the eurozone-wide print, which is only published tomorrow, will be available to markets today. As is increasingly the case, focus will be squarely on service inflation.   After the sharp re-pricing in BoE hike expectations Catherine Mann’s speech will be closely watched, although, as the most hawkish member on the MPC, we don’t see her as the most likely member to push back against the nearly 100bp of further hikes priced by the curve.   In the US, the decline in job openings is expected to continue, albeit at a more modest pace than last month. Details of the report, such as a worsening of the quits rate, will be closely watched for hints of a further softening of the labour market into Friday’s non-farm payroll release.

Condensing complex macro readings into one number for rates It's often tough to summarise macro circumstances into a simple implication for rates. Right now it's particularly tough. Here we illustrate the contradictions, and bring it together into one number for rates. For the US, that number is 6%. For the eurozone, it's 4%. These are not targets. But they are relevant references to contrast levels against.   Some US macro numbers are pointing in dramatically different directions right now. Witness the stark juxtaposition between strong ongoing payrolls growth versus manufacturing and services surveys entering recessionary territory (low 40s for some components of the manufacturing PMI).   And on the inflation front, while there is evidence of more subdued pipeline pressure, core inflation remains elevated (in the area of 5%).   To help assess where we are in terms of rates pressure, we employ a simple model that aggregates the macro arrows pointing in different directions to a single outcome for rates. For example, readings on consumer price inflation are off the charts, as are readings on the labour market.   In contrast, PMIs are more in tune with a material slowdown, and in fact point to a recessionary tendency. Then we have the housing market, that had looked like it was about to implode lower, but has been fighting back of late. And then we have consumer confidence, which continues to hold up. It’s off the highs, but refuses to materially lie down.     We input all of these factors into our model where we look at how our selected variables deviate from normal, apply weights to each component, and then aggregate that to a deviation from normal for rates.   The outcome of this process is a single number, and that number is 3%. What does this mean? It tells us that based on contemporaneous circumstances, rates should be about 3% above normal.   And what’s normal? We think 3%, based on a neutral real rate of 0.5% to 0.75% and inflation of 2.25-2.50%. So we take our 3% neutral rate and add our 3% deviation above normal to that, to get 6%.   How do we interpret this? It suggests that based on where macro circumstances are right now, rates should be around 6%. This supports the Fed being above 5% currently.     And, by the way, our model for the eurozone has a deviation above normal now of 1.9%. Adding that to a neutral rate of 2% (zero real rate) sums to 3.9%. Effectively this points to the 4% area as the level that eurozone rates could or should be referenced against.     Back in the US, the fed funds rate at 5.25% is still below 6%. But bear in mind that the Fed has 2.5% as its implied neutral rate. So that, plus the 3% deviation from normal, gives 5.5%. In that respect, the Fed is already there or there abouts in terms of tightening requirements (from their perspective).   But the 10yr Treasury rate remains low in relative terms. The highest yield hit in this cycle was 4.5% in the fourth quarter of 2022, and again briefly it got to that area in March this year (just prior to the Silicon Valley Bank collapse). The suggestion is the US 10yr never really got to the heights that it should have during this cycle.   We are not suggesting that the 10yr yield needs to get to 6%. But we are pointing to the fact that it never did hit anything near that level. Also, we are noting that it remains well below that level, even as many indicators are pointing to a degree of macro stubbornness to slowdown enough to help kill off inflation. So there is a net risk here for residual upward pressure on market rates.   None of this factors in forecasts for the future, market discounts, the impact of recent banking angst in the US, or the tightening in lending standards for example. These factors generally pull lower on the headline rates identified here, or in due course argue for lower rates in the future.     Hence the curve inversions seen. Still, degrees of inversion can still be referenced within a framework that identifies long run neutral rates and a current rationale for deviation from them.   While there are some good reasons to expect market rates to fall (weak PMIs for example), our preferred expectation from here is to see some further upward pressure on market rates first.   The 4% area for the 10yr Treasury yield for example remains a generic target that could well be hit in the coming month or so. And higher would not look wrong, in the near term. That does not affect our medium term view which still sees 3% as the trough level to aim for on the US 10yr, by the end of 2023 and into 2024.  

China cuts rates ahead of monthly activity data While there has been some speculation about rate cuts, today's cut was not widely expected, and coming just ahead of the monthly activity data suggests that this set of numbers could be very weak.   Reverse repo rate cut, 1Y MLF next? Before today's hike, the received wisdom had been that the People's Bank of China would not use blanket rate cuts as a first resort, but would rather use some of its more focused tools, such as targeted RRR cuts. So the 10bp cut of the 7-Day reverse-repo rate today raises some questions.   The first of which is whether this will be followed by a cut to the 1-Year Medium-Term Lending Facility (1Y MLF) on Thursday. Our first guess on this is, yes, probably. After all, window guidance on deposits was also lowered earlier in the month, so there does seem to be a general easing of policy going on.   The next question is, why now? What has changed? Certainly, China's reopening has been quite tepid, with a catering-led consumer spending surge that already looks to be losing steam and manufacturing still struggling. Activity data on retail sales is also due on Thursday, and it may be no coincidence that rates are being eased only days ahead of this release if it turns out that the reopening is already sputtering.   If the one engine of growth - retail sales - is not delivering what is required of it, and if the other sectors of the economy are failing to pick up the slack, then broader stimulus measures like these would seem appropriate. The consensus forecast for retail sales is for a 13.8% year-on-year rise, which sounds pretty strong. But it translates into about a 1% month-on-month (sa) decline, and the apparent strength is all due to base comparisons.   7-Day reverse repo rate and USD/CNY       CNY weaker, will drag other currencies with it The Chinese yuan has weakened above 7.16 at times today, adding to the month and a half of weakness it has already experienced. Further stimulus may prompt some short-term reversals, or slow the slide. But it may take a more concerted improvement in the macro data before the CNY turns decisively. Short of a substantial boost from fiscal policy, such as loans from the central government to local governments to spur infrastructure spending, that doesn't look on the cards just yet, though today's move does indicate that the authorities' patience with the weak recovery is wearing thin.    

Activity data was very weak The main body of activity data can be summed up in one word. Disappointing. Retail sales is the figure we have been focussing on, as it is at the moment, the only functioning engine of Chinese growth. And although the year-on-year growth rate of 12.7% looks impressive, this equates to a seasonally adjusted decrease in month-on-month sales and shows that the re-opening momentum is falling.  Breaking the numbers down to look at what is driving growth, and catering is still the major driver, which won't do a lot to boost domestic production and manufacturing, though it does lift GDP. Vehicle sales is the only other notable contributor to growth, after which very little else is showing much signs of life, including consumer confidence bellwethers, like clothing.    Industrial production rose 3.5%YoY, though this was well down on the 5.6% rate of growth in April, and the year-to-date growth figure was unchanged at 3.6%.  Urban fixed asset investment slowed from 4.7% to only a 4.0% pace, which may illustrate the problems local governments are having trying to boost growth in the absence of cash from land sales. Some more central government support may be of help here if it is forthcoming.    Also, property investment continues to weaken and is now falling at a 7.2%YoY pace, down from -6.2% in April. We had been hoping for more of a flat line from property development in China in 2023 after what we calculate was about a 1.5pp drag on GDP growth in 2022. It could be worse than this.    Contribution to year-on-year retail sales growth

Poland: Solid wage growth in May while labour demand improves In May, average wages in the enterprise sector rose by 12.2% year-on-year, up from 12.1% in April. Double-digit wage growth should continue until 2025, allowing real wages to finally grow in mid-2023, after nearly a year of declines. Wages came close to expectations (consensus: 12.6% YoY). According to the release by the Central Statistical Office of Poland, the decline in average wages in May relative to April 2023 was due to a smaller scale of additional payments. Average employment in the enterprise sector increased by 0.4% YoY in May, in line with the consensus, following an increase of 0.5% YoY in the previous month.   Despite signs of a slowdown in many areas of the economy, the condition of the labour market remains robust. On the one hand, workers' wage expectations are driven by, among other things, high minimum wage increases, inflation, and persistent labour shortages in many sectors of the economy. On the other hand, companies' willingness to raise wages can be seen in surveys, such as the one recently conducted by the National Bank of Poland (text in Polish). Together with the high minimum wage hike in 2024, this suggests that wage growth will continue at double-digit levels until 2025. From the middle of this year, with inflation slowing down, wages should rise again in real terms, after almost a year of declines.   Labour demand, on the other hand, appears to be improving after some signs of weakness at the end of the first quarter. This is particularly evident in manufacturing, where employment fell continuously from May 2022 to March 2023. The construction sector is also doing better, which we link to the finalisation of projects financed by the "old" EU budget. In our view, the relatively low annual growth rate primarily reflects constraints of the labour supply.

Poland: Further declines in industrial activity and PPI Industrial production fell by 3.2% in May for the fourth consecutive month. Producer price growth slowed to 3.1% year-on-year from 6.2% YoY a month earlier. Ongoing disinflation may allow for symbolic policy easing by the National Bank of Poland this autumn. The drop in industrial production of 3.2%YoY came close to expectations (consensus: -3.0% YoY), following a 6.0% YoY decline in April (revised). This was the fourth consecutive month of year-on-year production decline. Adjusted for seasonal factors, production fell by 1.0% month-on-month, contracting for the third consecutive month. Manufacturing output fell by 2.7% YoY. We also saw declines in mining (11.2% YoY), power generation (6.5% YoY), as well as water supply and waste management (2.4% YoY).   Among the manufacturing divisions, the deepest year-on-year declines were seen in the production of wood products (22.5%) and chemicals (20.7%). By contrast, the largest increases were seen in the repair, maintenance and installation of machinery and equipment (36.2%), the manufacture of electrical equipment – including automotive batteries – (14.5%) and the manufacture of vehicles (11.7%).   The slightly slower-than-April year-on-year decline in industrial production was due to a more favourable calendar pattern, among other factors. May's manufacturing PMI report also suggested a slight improvement in new orders and current production, but a continued decline in seasonally adjusted month-on-month production remains concerning. We expect that the year-on-year decline in production will continue over the coming months. A positive sign is the increase in the production of capital goods (9.1% YoY), suggesting continued investment growth.   Producer price growth (PPI) slowed in April to 3.1% YoY (ING: 4.7%; consensus: 4.6%) from 6.2% YoY a month earlier (revised data). Compared to April, prices declined in all sections except water supply and waste management. This is the fourth consecutive month that the PPI index declined in month-on-month terms, and prices in manufacturing have been falling since November. On a year-on-year basis, declines in processing prices (1.7%) are being supported by a significant discount in the coke and refined petroleum products manufacturing division (30.5%). Prices in mining (15.5%) and energy production (37.0%) are still markedly higher than a year ago.   Producer prices remain on a clear disinflationary path, and the Monetary Policy Council expects CPI inflation to fall further as well. Recent statements by National Bank of Poland President Adam Glapinski indicate that the drop in CPI inflation to single-digit levels in September, which we expect, could result in a rate cut this autumn. This will not yet be the start of a full easing cycle, which we expect only in the fourth quarter of 2024. We see a number of inflation risks in the medium term, highlighted by central bankers in core markets maintaining a restrictive monetary policy stance.

France: business climate stabilises, but growth outlook remains weak Business sentiment stabilised in France in June. The industrial sector is benefitting from the return to normal in the automotive sector, while the summer looks set to be a good one for the services sector. These temporary factors are mitigating the subdued outlook, but growth will remain weak over the coming quarters.   Automotive and services more optimistic The business climate figures are the first data to be published for the month of June, allowing us to better examine the economic situation in France at the end of the second quarter. And the news is not bad. The business climate stabilised in June, at 100, the level of its long-term average. While the situation is improving in the industrial and retail sectors, it is deteriorating further in the construction sector. The improvement in business sentiment in the industrial sector is particularly noteworthy, after weakening for several months, not only in France but also in the rest of the world. Manufacturers are more positive about past production, but also about future production prospects and order books. The details indicate that it is the automotive industry that is seeing its situation improve most, which probably follows the easing of supply chain problems. This is therefore more likely to be a catch-up effect from a previously disrupted situation than the start of a new trend. In the services sector, business sentiment is stable and still above its long-term average. Interestingly, the outlook for business activity has risen slightly. This increase is largely due to businesses in the accommodation and catering sector, which are much more optimistic about activity over the coming months. This indicates that the summer is shaping up to be a very good one for the French tourism sector, which will support economic growth in the third quarter. In the retail sector, order intentions and inventories are up. In construction, the business climate continues to decline for the sixth month in a row. Finally, price intentions are down in all sectors. This is a further sign that the inflation peak in France should finally be behind us, and that price growth should be less dynamic in the coming months. The fall in inflation is likely to take time, however, as price intentions in services remain high, despite falling over the past two years.   Growth likely to remain weak in 2023 and 2024 Ultimately, based on all the available figures, it seems that France is facing a moderation in its growth prospects. In the short term, however, this moderation will be mitigated by the catching-up of the automotive industry and the good health of the tourism sector, which continues to benefit greatly from the post-pandemic recovery. These factors should support growth in the third quarter but are likely to run out of steam after that. The end of 2023 and 2024 are likely to be much weaker, against the backdrop of a global economic slowdown and high interest rates that will have an increasing impact on demand. We are still expecting growth of around 0.5% this year, a forecast close to those of the Banque de France and INSEE, which are predicting 0.6%. For 2024, we are less optimistic than the central banks, forecasting French GDP growth of 0.5% (compared with a forecast of 1% by the Banque de France).  

EUR: PMIs hardly a game-changer for the ECB The ECB had to resist two main dovish arguments at the June meeting: a faster decline in inflation, and signs of slowing growth outlook. The second will be tested again today with the release of PMIs. Consensus is looking at declining services PMI for a second consecutive month in the euro area and Germany, while manufacturing is seen holding up better. The composite EZ gauge is expected to decline very marginally from 53.9 to 53.3. At this stage, it will probably take a pretty clear sub-consensus surprise print to prompt a materially negative euro reaction. The ECB has demonstrated it is firmly focused on inflation, and the debate around a September hike (a July one should be a done deal, according to President Christine Lagarde) does not seem likely to take these surveys under much consideration.   The euro is showing more resilience than other activity currencies to the rebound in the dollar, and barring big downside surprises in PMIs may hold above 1.0900 into next week.

GBP: A sharply inverted yield curve can come in handy The pound’s neutral reaction to the Bank of England’s 50bp hike yesterday would suggest that was a well-telegraphed outcome. Instead, markets were only pricing in 35bp before the meeting. The market impact of the BoE’s surprise move must therefore be seen in the context of the pricing across the Sonia curve. 150bp of tightening was already priced in before the meeting, and investors are now looking at a 6.0%+ peak rate after the hike. The attempt by the BoE to get ahead of the curve with more aggressive tightening is being accompanied by rising speculation that this will trigger monetary easing starting in the summer of 2024. Still, that price development is not enough to impact the highly inverted shape of the GBP yield curve. From a currency perspective – as we note in the BoE review note – a sharply inverted yield curve can work as a positive factor for a reserve currency like the pound (as opposed to growth-sensitive currencies). We suspect that a rebound to 0.88 in EUR/GBP will need to be delayed on the back of that. The data calendar includes PMI releases in the UK today, with consensus expecting a marginal deterioration for both manufacturing and services. This morning, retail sales for the month of May declined less than expected.

European and US stock markets have seen a significant shift in sentiment over the past few days when it comes to the global economy. Rising bond yields, driven by more hawkish central banks, which has prompted investors to reassess the outlook when it comes to valuations and growth.     While European markets saw their biggest weekly loss since March, US markets also took a tumble, albeit the first one in 8 weeks, as a succession of central banks pledged that they had significantly further to go when it comes to raising rates. Bond markets also started to flash warning signs with yield curves becoming more inverted by the day whether they be France, Germany, or the UK. Friday's weak finish hasn't translated into a strongly negative vibe as we start a new week for Asia markets, even allowing for events in Russia at the weekend which aren't likely to have helped the prevailing mood, with the US dollar slightly softer this morning after getting a haven bid at the end of last week.     With economic data continuing to show varying signs of vulnerability, particularly in manufacturing the situation could have got even spicier over the weekend when Wagner Group boss Yevgeny Prigozhin set his troops on the road to Moscow in an insurrection against the Kremlin, and Russian President Vladimir Putin.   As it turns out a crisis was quickly averted when it was announced that Prigozhin would go into exile in Belarus, with any charges against him dropped, and Wagner troops would return to their bases. One can only imagine the reaction if that news had broken if markets had been open at the time, however it only adds to the general uncertainty surrounding the war in Ukraine and how quickly things can start to unravel.   This weekend's events also serve to indicate how fragile Vladimir Putin's position is given that one of his most trusted advisors suddenly went rogue.   As we look ahead to the final week of June and the end of the quarter, as well as the first half of the year we can reflect to some extent that markets have held up rather well when all things are considered. They have been helped in that by the sharp falls in energy prices back to pre-Russian invasion of Ukraine levels, as well as the low levels of unemployment which have served to keep demand reasonably resilient.     The elephant in the room has been the stickiness of core inflation as well as signs that demand is starting to falter, and this week we could get further confirmation of that trend.   Today we get the latest Germany IFO Business Climate survey for June, which if last week's flash PMI numbers are any guide could well show that the confidence amongst German business is faltering, with expectations of a slowdown to 90.6, from 91.7.     We also get flash CPI inflation numbers from Germany, France and the EU where headline prices are likely to show further signs of softening, with core prices set to remain sticky. At around the same time we get the latest PCE inflation numbers from the US for May.   These are likely to be important in the context of the Federal Reserve's stated intention to raise interest rates at least twice more before the end of the year.     In April the core PCE Deflator edged up from 4.6% to 4.7%, an area it has barely deviated from since November last year. You would have thought that even with the long lags seen from recent rate hikes they would start to have an impact on core prices.   This perhaps explains why central banks are being so cautious, even as PPI prices are plunging and CPI appears to be following.       EUR/USD – pushed briefly back above the 1.1000 level yesterday before slipping back, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which should act as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – currently holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – failed to rebound above the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – has finally moved above the 142.50 area, which is 61.8% retracement of the 151.95/127.20 down move, as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 6 points higher at 7,468     DAX is expected to open 28 points higher at 15,858     CAC40 is expected to open 8 points higher at 7,171

Slow start following an eventful weekend.    The weekend was eventful with the unexpected rebellion of the Wagner Group against the Kremlin. Yevgeny Prigozhin's men, who fight for Putin in the deadliest battles in Ukraine walked towards Moscow this weekend as Prigozhin accused the Kremlin of not providing enough arms to his troops. But suddenly, Prigozhin called off the attack following an agreement brokered by Belarus and agreed to go into exile. The Kremlin took back control of the situation, but we haven't seen Vladimit Putin, or Prigozhin talk since then. The Wagner incident may have exposed Putin's weakness, and was the most serious threat to his rule in two decades. It could be a turning point in the war in Ukraine. But nothing is more unsure. According to Volodymyr Zelensky, there are no indications that Wagner fighters are retreating from the battlefield.  The first reaction of the financial markets to Wagner's mini coup was relatively calm. Gold for example, which is a good indication of market stress at this kind of moment, remained flat, and even sold into the $1930 level. The dollar-swissy moved little near the 90 cents level. Crude oil was offered into the $70pb level, as nat gas futures jumped more than 2% at the weekly open, and specific stocks like United Co. Rusal International, a Russian aluminum producer that trades in Hong Kong, gapped lower at the open but recovered losses.  Equities in Asia were mostly under pressure from last week's selloff in the US, while US futures ticked higher and are slightly positive at the time of writing.    The Wagner incident will likely remain broadly ignored by investors, unless there are fresh developments that could change the course of the war in Ukraine. Until then, markets will be back to business as usual. There is nothing much on today's economic calendar, but the rest of the week will be busy with a series of inflation reports from Canada, Australia, Europe, the US, and Japan.     Except for Japan, where the Bank of Japan (BoJ) doesn't seem urged to hike the rates, higher-than-expected inflation figures could further fuel the hawkish central bank expectations and add to the weakening appetite in risk assets.     The Federal Reserve (Fed) will carry its annual bank stress test this week, to see how many more rate hikes the baking sector could take in and the potential for changes in capital requirements down the road. The big banks are likely not very vulnerable to higher capital requirements, yet the profitability of the US regional banks could be at jeopardy and that could cause investors to remain skeptical regarding the US banking stocks altogether. Invesco's KBW bank ETF slipped below its 50-DMA, following recovery in May on the back of decidedly aggressive Fed to continue hiking rates, and stricter requirements could further weigh on appetite.    Zooming out, the S&P500 is down by more than 2% since this month's peak, Nasdaq 100 lost more than 3% while Europe's Stoxx 600 dipped 3.70% between mid-June and now on the back of growing signs that the aggressive central bank rate hikes are finally slowing economic activity around the world. A series of PMI data released last Friday showed that activity in euro area's biggest economies fell to a 5-month low as manufacturing contracted faster and services grew slower than expected. The EURUSD tipped a toe below its 50-DMA last Friday but found buyers below this level. Weak data weakens the European Central Bank (ECB) expectations, but that could easily reverse with a strong inflation read given that the ECB is ready to induce more pain on the Eurozone economy to fight inflation.     Across the Channel, the picture isn't necessarily better. Both services and manufacturing came in softer than expected. And despite the positive surprise on the retail sales front, retail sales in Britain slumped more than 2% in May, due to the rising cost of living that led the Brits back from loosening their purse string. One thing though. UK's largest lenders agreed to give borrowers a 12-month grace period if they missed their mortgage payments as a result of whopping costs of keeping their mortgages due to the aggressively rising interest rates. Unless an accident – in real estate for example, the Bank of England (BoE) will continue hiking the rates and reach a peak rate of 6.25% by December.   The only way to slow down the pace of hikes is to find a solution to the sticky inflation problem. And because the BoE has limited influence on prices, Jeremy Hunt will meet industry regulatory this week to discuss how they could prevent companies from taking advantage of inflation and raising prices more than needed, which adds to inflationary pressures through what we call 'greeflation'. But until he finds a solution, the BoE has no choice but to keep hiking and the UK's 2-year gilt yield has further to run higher, whereas the widening gap between the 2 and 10-year yield hints at growing odds of recession in the UK, which should also prevent the pound from gaining strength on the back of hawkish BoE. Cable will more likely end up going back to 1.25, than extending gains to 1.30.       By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  

South Africa A very quiet week with PPI the only notable release. Inflation is falling back towards target and the PPI may offer insight into whether those pressures are continuing to head in the right direction.   Turkey Thursday’s 6.5% rate hike suggests Turkey is on the path back to a conventional monetary policy approach. Markets were pricing in a lot more but with President Erdogan openly against hiking rates – despite replacing the Governor who was happy to cut on his behalf – the CBRT may be treading a little carefully. As we’ve seen before, Erdogan will not hesitate to sack a Governor so perhaps his new appointment simply has ambitions to still be employed in September. No major economic releases next week.   Switzerland There are a few data releases next week, but SNB Chair Thomas Jordan’s appearance will probably be the highlight. The SNB hiked rates by 25 basis point this past week and markets believe there’s another in the pipeline. Jordan previously hinted at the neutral rate being 2% and the SNB indicated on Thursday that another hike may follow. With inflation forecast to stay above 2% for the next couple of years, only a drop in it over the next couple of months may change the SNBs mind.   China Not much action on the economic data front with the only key data on manufacturing and services activities to digest. On Friday, we will have the release of the NBS Manufacturing and Non-Manufacturing PMIs for June. Manufacturing PMI is forecasted to rebound slightly to 49.0 after it contracted to a five-month low of 48.8 in May. In contrast, the growth trajectory of Non-Manufacturing PMI is forecasted to dip to 53.7 in June from 54.5 in May. If it turns out as expected, it will be the third consecutive month of a growth slowdown in services activities. These data will be closely watched to determine and gauge the next move from China’s top policymakers as market participants wait eagerly for the amount and scope of an impending new fiscal stimulus measure that the State Council stopped short of giving out any details about it last week. India A couple of key data to take note of on Friday; bank loan growth, Q1 current account where its deficit is forecasted to narrow to -$16 billion from $-18.2 billion recorded in Q4 2022, and Q1 external debt that is forecasted to edge lower to US$602 billion from $613.1 billion recorded in Q4 2022.

German Business Confidence falls for second straight month ECB’s Lagarde hosts central banking conference in Portugal EUR/USD is drifting higher on Monday. In the European session, EUR/USD is trading at 1.0917, up 0.20%.   German business confidence slips Germany once prided itself as being the locomotive of the eurozone, which blazed the way with a strong economy. The country is still by far the largest economy in the bloc, but hard times in the global economy haven’t spared Germany. The week started with disappointing news as the German Ifo Business Climate index dropped for a second straight month, falling from 91.7 to 88.5 in June. This missed the consensus of 90.7 and was the index’s weakest level this year. The Ifo release did not indicate reasons for the decline, but a weak global economy, exacerbated by China’s wobbly recovery, and the ECB’s aggressive tightening appear to be weighing on business sentiment. Last week’s German PMI data indicated slower activity in manufacturing and services. Manufacturing has been mired in a recession and fell from 43.5 to 41.0 points. Services is showing growth, but slipped from 54.7 to 54.1 points. The 50 line separates contraction from expansion. The ECB has been playing catch-up with inflation but has made progress as higher rates have dampened economic activity in the eurozone. The ECB has hinted strongly that it will raise rates in July and there is a strong possibility of another hike in September or October. ECB President Christine Lagarde will be in the spotlight as host of the ECB forum on Central Banking in Sintra, Portugal this week. The markets will be monitoring her remarks and looking for insights into future rate policy, which could result in stronger movement from the euro. . EUR/USD Technical EUR/USD is testing resistance at 1.0916. Next, there is resistance at 1.0988 1.0822 and 1.0780 are providing support

German disinflationary trend pauses for the summer German inflation increased in June to 6.4% year-on-year, from 6.1% YoY in May. But what looks like an end to the disinflationary trend of the last few months is only a temporary break. Disinflation should gain more momentum after the summer. According to the just-released first estimate, German headline inflation increased in June, coming in at 6.4% year-on-year (from 6.1% YoY in May). The harmonised European measure showed German headline inflation at 6.8% YoY, from 6.3% in May. This marks an end to the disinflationary trend seen over the last six months. However, a closer look at the data suggests that the disinflationary trend will gain new and even stronger momentum after the summer.   Disinflationary trend has paused, not stopped Inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the European Central Bank to take this data at face value. Government intervention and interference, whether temporary or permanent or occurring this year or last, will continue to blur the picture. Today’s inflation data show that headline inflation is and will be affected by several base effects: while lower energy prices insert downward pressure on inflation, the end of last summer’s temporary government energy relief measures has inserted upward pressure. Looking at monthly price changes actually paints a promising picture of German inflation dynamics. For the third month in a row, food prices have dropped month-on-month. Prices for clothing have dropped for the first time since January; a tentative sign of weaker demand and price discounts. With still lower-than-expected energy prices, dropping food prices and fading pipeline price pressures in both services and manufacturing, German (and eurozone) inflation could come down faster than the ECB expects, at least after the summer. In fact, there is the risk that another chapter will be added to the misconceptions of inflation dynamics: after ‘inflation is dead’ and ‘inflation is transitory’, we could now have ‘inflation will never come down’. Don’t get us wrong, we still believe that, structurally, inflation will be higher over the coming years than pre-pandemic. Demographics, derisking and decarbonisation all argue in favour of upward pressure on price levels. However, be cautious when hearing comments that inflation will never come down. These comments might come from the same sources that only a few years ago argued that inflation would never surge again. This does not mean that the loss in purchasing power as a result of the last inflationary years will be reversed any time soon. It only means that headline inflation can come down faster than currently anticipated. We see German headline inflation falling to around 3% towards the end of the year. Admittedly, the risks to this outlook are obvious: sticky core inflation, wage pressure and government measures to support the demand side of the economy.   ECB will continue to hike ECB President Christine Lagarde made it clear at this week’s ECB forum in Sintra that the job is not done, yet. We, however, still think that the ECB is too optimistic about the eurozone’s growth outlook. Historic evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. These are two strong arguments for a further slowing of core inflation in the second half of the year and reasons to start doubting the need for further rate hikes. But, the ECB simply cannot afford to be wrong about inflation (again). The Bank wants and has to be sure that it has slayed the inflation dragon before considering a policy change. This is why it is putting more emphasis on actual inflation developments, and why it will rely less on forecasts than in the past. As a consequence, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point and will continue hiking until then. If we are right and the economy remains weak, the disinflationary process gains momentum and core inflation starts to drop after the summer, the ECB’s hiking cycle should end with the September meeting.

South Korea: stronger-than-expected activity data indicates recovery continues this quarter In May, all industry industrial production rose 1.3% MoM sa, with rising manufacturing production, retail sales, and investment. 2Q23 GDP should therefore accelerate modestly from the previous quarter. However, weak forward-looking data and the recent decline in service activity could suggest softer investment and consumption in 2H23.   Semiconductor output cuts plan yet to materialize in May Manufacturing industrial production unexpectedly rose 3.2% MoM sa in May (vs -0.9% market consensus) while April's production was revised up to -0.6% (vs -1.2%.). By product item, vehicle production (8.7%) gained again, reflecting strong demand from abroad. The upside surprise mainly came from the output gain in semiconductors (4.4%). NAND flash and system-chip production led the overall growth, but DRAM output also rose. It usually takes 6 months to reduce production, thus the planned production cuts are not evident in the May outcome. Also, the recent strong demand for AI chips may also have had some positive impact. Production gains in semiconductors also contributed to the rise in inventories (0.6%).   Manufacturing production suggests a GDP recovery in 2Q23   Consumption and investment activity rose in May Although retail sales rebounded 0.4% MoM sa, this only partially reversed the previous month’s 2.6% decline, and the underlying trend of retail sales appears to be weakening. In May, sales of home appliances were boosted by idiosyncratic factors such as the unseasonally warm weather compared to average and the sharp rise in moves to newly developed apartment complexes. However, in our view, this positive impact will reverse in the coming months. Also, with car sales declining for three months in a row, we believe that this quarter’s consumption growth will be smaller than the previous quarter. Meanwhile, both equipment and construction investment rose. Transportation-related equipment investment continued to rise solidly. Strong vehicle demand and aircraft investment due to increased travel are the main reasons.     Investment stayed in the contraction zone, but is bottoming out Service activity continued to decline for three months in a row In contrast to solid manufacturing and investment activity, service outcomes declined by 0.1% in May. Professional, science, and technology activity (3.2%) gained but were more than offset by the decline in financial (-4.1%), accommodation & restaurant activity (-4.5%). Along with the softening of retail sales, this is in line with our view that the support to growth from re-opening is running out of steam.   Growth outlook We believe Korea’s 2Q23  GDP will recover a bit more than we had expected. But, forward-looking orders, signs of softening retail sales and service activity, and an unfavourable inventory cycle will likely weigh on manufacturing, consumption, and investment in 2H23. Thus, we will revise our GDP outlook after checking the June export data released tomorrow

Switzerland CPI inflation data on Monday is expected to show the headline rate falling back below 2% to 1.8% in June. Markets are still pricing in a 25 basis point hike in September at the moment but that may change if the data matches expectations and, importantly, remains below 2%. Unemployment is also released on Friday.   China Another set of lackluster data seen on the official NBS manufacturing and non-manufacturing PMIs for June released on Friday. Manufacturing activities continued to contract for the third consecutive month at 49 and growth in the services sector decelerated to a 5-month low at 53.2 from 54.5 in May. The focus will now turn to the Caixin manufacturing PMI which consists of small and medium enterprises out on Monday. Markets are expecting almost an unchanged condition of 50.2 for June versus 50.9 recorded in May. The Caixin services PMI will be released on Wednesday with a forecasted slowdown in growth to 56.5 for June from 57.1 in May. Time is running out for the implementation of fresh fiscal stimulus measures.   India The manufacturing PMI is released on Monday, where the consensus is expecting a slight growth slowdown to 58 for June from 58.7 in May, its strongest reading since October 2020. A similar trajectory is anticipated for the services PMI on Wednesday where growth is expected to dip to 60.2 in June from 61.2 recorded in May, a continuation of consolidation from April’s near 13-year high of 62.   Australia The key highlight for this week will be RBA’s monetary policy decision on Tuesday. The consensus is calling for another 25 basis points hike on the cash rate, bringing it to 4.35% after recent hawkish guidance inferred from the minutes of the prior meeting. However, the interest rates futures market has implied a reduction in the odds of a 25 bps hike due to the recent softer-than-expected annualized monthly CPI data for May; 5.6% from 6.8% in April and below expectations of 6.1%. As of 29 June, the ASX 30-day interbank cash rate futures has priced in a 28% chance of 25 basis points (bps) hike on the cash rate, down from a 53% chance priced two weeks ago on 16 June. On Thursday, we will have the balance of trade for May where April’s surplus of A$11.16 billion is expected to narrow to A$10.5 billion. If it turns out as expected, it will be the narrowest trade surplus since August 2022.   New Zealand No key data.  

What happens if central banks hike interest rates too much, and how a renewed crisis in the banking system could weigh on the global economy.   Aggressive interest rate hikes trigger a ‘hard landing’ Our base case: The most aggressive rate hike cycle in decades will no doubt take its toll. We’re more concerned about the US, where a tightening in lending standards post-banking crisis is likely to trigger more noticeable weakness in hiring and investment. Europe is currently enjoying the benefit of lower energy prices, which partly offsets the impact of higher rates in the short term. But the longer-term outlook for Europe remains one of subdued growth at best. In the US, we’re not expecting a deep downturn, and developed economies are insulated by the greater prevalence of fixed-rate mortgages relative to past crises. That makes for a longer/more drawn-out transmission to the economy. Stagnation is likely, and the impact of higher rates is less concentrated in any single quarter. Risk scenario and how it plays out: There are three ways things could be worse than we expect. Firstly, central banks hike more aggressively than currently expected – and with rates already well into restrictive territory, that would make deeper recessions in 2024 more inevitable. Rates at 6% or above in the UK and US, or 5% in the eurozone, would be challenging. Secondly, businesses begin to feel the pinch more acutely. Corporates have enjoyed pricing power over the past couple of years as economies emerge from Covid. But that’s fading as consumer demand – especially for goods – abates, and the impact of interest rates on unemployment could accelerate as debt servicing becomes a greater challenge. Finally, a high interest rate environment raises the risk of something breaking in the financial system. March’s banking crisis was a taster of that, and despite central banker assurances to the contrary, persistently higher interest rates clearly risk having knock-on effects for financial stability. The feedback loop could tighten lending standards yet further, adding to the pressure on smaller businesses as well as real estate and the construction sector. Wider economic impact: We’d expect to see many major economies enter recession through the early part of 2024, or perhaps earlier. Where economic weakness has so far been concentrated in manufacturing, we’d expect the service sector to enter a downturn too. That would see a corresponding easing in service-sector price pressure, via lower wage growth. Central banks would turn to rate cuts much earlier than we’re currently forecasting.  

The latest data show that eurozone growth is not picking up, with services now also losing steam. While it’s not all downhill from here, subdued growth is the best we can hope for. Inflation is now clearly coming down, but the European Central Bank is still set for two more rate hikes.   (Overly?) optimistic ECB growth outlook After negative growth over the winter quarters, the ECB’s staff forecasts pencil in a gradual acceleration of eurozone GDP growth to 0.3%, both in the second and third quarters of this year, and 0.4% from the fourth quarter onward. However, eyeballing the most recent data, it doesn’t look as if the eurozone economy is accelerating – on the contrary. The first real indicators for the second quarter, such as retail sales and industrial production, actually came out below the average of the first quarter. And sentiment indicators for May and June rather point to further deterioration. The €-coin indicator, a monthly tracker of GDP growth, averaged -0.3% for April and May. In that regard, we fear that second-quarter growth will be close to 0%, with a non-negligible probability of negative growth.   Manufacturing in recession and services is slowing    

The Irish economy appears to be going from strength to strength, growing rapidly following a solid start to 2023. Ireland isn't immune to global headwinds, however, and growth expectations could soon begin to slow as high inflation, rising interest rates and weaker global demand take their toll.   Global headwinds weigh on surging growth It was a confusing start to the year for the Irish economy. We saw GDP shrink by 4.6% quarter-on-quarter – mainly driven by multinational-dominated sectors –while the domestic economy actually bounced back from a few weaker quarters and grew by 2.7%. This signals continued strength in the overall trend for Ireland and suggests that the boom of recent years has not yet come to an end. This year, we continue to expect the Irish economy to outperform compared to its European peers – although Ireland is also not immune to broader drivers of weakness. As a result, high inflation, higher interest rates and weaker global demand are dampening the growth outlook for the year ahead.     Modified domestic demand saw a strong bounce back from weakness at the end of 2022   Purchasing power and business expectations to provide support The services sector continues to be a very strong driver of economic activity in Ireland at the moment. The PMI for services was at 57 in June, well above the eurozone average and indicative of strong expansion. The manufacturing PMI indicates contraction, although traditional industrial production continues to show strong year-on-year growth. The strong service sector reflects large business services activities, but also strong domestic consumption activity. Unemployment stands at a very low 3.8%. Wage growth trends above 4% at the moment, not too far from where inflation sits. Over the course of the year, purchasing power is set to improve again, which should provide further support for consumption activity. The housing market, however, is starting to turn. Price growth has been negative for a few months, although the latest data suggests a bottoming out. Mortgage approvals have increased again in March and April, which adds to tentative signs of a bottom. Keep in mind the full impact of higher interest rates may still have to play out. Still, the market remains tight with structural undersupply, which dampens the negative effect of higher rates on Irish housing. Construction activity is set to rebound in the months ahead. While the PMI has been negative for some time, commencements have been on the rise again and business expectations have been improving. Expect this to support the economy over the rest of the year. Strength in government finances accompanies economic boom Overall, this strong economic performance – to a large degree fuelled by multinational activity – is resulting in sound government finances. Windfall corporate taxes are an important contributor to that. Talk of a sovereign wealth fund also appears to be emerging, which is a luxury that many eurozone countries would only dream of. In the fourth quarter of 2022, Irish government debt stood at 44.7% of GDP, which is more than 10 percentage points down from the previous year. Clearly, the economic boom is now accompanied by a strong improvement in government finances.    

UK economy set to contract in May, US PPI to slow further   We saw another day of strong gains for European markets yesterday, with the FTSE100 undergoing its best one-day gain since early June, after US CPI came in below forecasts.   US markets also saw strong gains with the S&P500 and Nasdaq 100 breaking above their highs of this year, and pushing up to their highest levels since April 2022, with the Nasdaq 100 leading the gains.   Asia markets followed suit with strong gains across the board despite the latest set of China trade data for June showing that economic activity slowed further. Exports fell by -12.4% from a year ago, missing expectations by a large margin, while imports also declined more than expected, by -6.8%, further reinforcing concerns about deflation, but on the more positive side increasing expectations of stronger stimulus by Chinese authorities in the weeks ahead.        Yesterday's US CPI numbers for June were never likely to change the calculus behind another 25bps rate hike when the Fed meets in two weeks' time, but they have altered the story when it comes to what might come next, and it is this that markets are reacting to, with the US dollar and yields falling back sharply.   The nature of yesterday's numbers suggest that whatever other Fed officials would have us believe in the context of their current hawkishness, further rate hikes beyond this month will be a big ask, and probably won't happen, hence the weakness seen in both the US dollar, and US yields seen so far this week.   That said we can still expect Fed officials to continue to adopt a hawkish tone on the basis that theywon't want markets to prematurely start pricing in rate cuts and will want to keep the option of further hikes very much on the table.     Nonetheless the shift seen in the last few days does help to explain why the US dollar has slipped so much against the Japanese yen, although some are suggesting it is because we might see a policy shift from the Bank of Japan when it meets at the end of this month. Whichever way you come at it from, the net effect is likely to be the same, in that US and Japanese rates are likely to converge, rather than diverge. Today's PPI numbers for June are expected to reinforce the disinflation trends being seen rippling out through the global economy. On the headline numbers PPI is expected to see another sharp slowdown from 1.1% in May to 0.4% in June, while core PPI is forecast to slow down more modestly from 2.8% to 2.6%. Whichever way you look at it, further weakness here is likely to trickle down into the CPI numbers in the coming months, and reinforce the disinflationary narrative, but more importantly signal that US rate hikes are done bar the move in two weeks' time.     Yesterday's US inflation numbers could prove to be good news for UK homeowners, if yesterday's move in UK yields is any guide, in that they might reduce the pressure on the Bank of England to be more aggressive in terms of their own rate hiking policy.   If this month's expected July hike from the Federal Reserve is in fact the last one, then the Bank of England may only need to do another 50bps in August before similarly signalling a pause, which means that UK current terminal rate pricing is too high. This would be an enormous relief for mortgage holders worried that the base rate might rise as high as 6.5%.  The problem for the UK is the energy price cap is keeping inflation levels way too high, and now it has outlived its usefulness it really ought to be scrapped. It was useful in containing the upside, however by way of its design its not reflecting the sharp declines in gas prices in the last 12 months.      Consequently, it is contriving to exert upward pressure on wages as consumers struggle with the higher cost of living due to energy prices not coming down quickly enough. This failure is likely to be reflected in today's UK economic data for May, which is expected to see manufacturing and industrial production to sharp 0.4% declines in economic activity for both. The monthly GDP numbers for May are also forecast to show a -0.3% contraction due to the multiple bank holidays during the month, as well as widespread public sector strike action, with index of services seeing a sharp slowdown from 0.3% in April to -0.2%. The weak performance in May is likely to act as a sizeable drag on Q2 GDP, although we should see some of that recovered in June.             EUR/USD – broke higher through the highs of this year and could well retest the highs of March 2022 at 1.1185. This becomes next resistance, with a break targeting the 1.1485 area, with support now at 1.1020.     GBP/USD – has encountered resistance at the 1.3000 area. We need to see a break above 1.3020 to target a move towards 1.3300, and the March 2022 highs. Support now comes in at the 1.2850 area.       EUR/GBP – failed again at the 0.8500 area, with the rebound currently holding below the 0.8570/80 area. A break above here targets the 50-day SMA which is now at 0.8610.     USD/JPY – slid down to the 138.15 area where we have cloud support. If this gives way, we could see further losses towards 137.20. We now have resistance back at the 140.20 area.     FTSE100 is expected to open 4 points higher at 7,420     DAX is expected to open 20 points higher at 16,043     CAC40 is expected to open 23 points higher at 7,356    

The fever is breaking.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   US inflation eased to 3%. It's still not the 2% targeted by the Federal Reserve (Fed), but it's approaching. Core inflation on the other hand eased more than expected to 4.8%. That's still more than twice the Fed's 2% policy target, but again, the US inflation numbers are clearly on the right path, the services inflation including shelter costs is easing, and all this is good news for breaking the Fed hawks back amid mounting tension over the past few weeks.   There hasn't been much change in the expectation of another 25bp hike at the Fed's next policy meeting, which is now given a more than 90% chance, but the expectation for a September hike fell, the US 2-year dropped to 4.70% after the CPI data, while the 10-year yield fell to 3.85%.   One big question is: if inflation is easing at a – let's say - pleasing speed, why would the Fed bother raising the interest rates more? Wouldn't it be better to just wait and see where inflation is headed?   Well yes, but the Fed officials certainly continue thinking that 4.8% is still too hot, and that the risk of a U-turn in inflation expectations, and inflation is still to be carefully managed. Because the favourable base effect due to energy prices will gently start fading away in the coming months and the result on inflation will be less appetizing. Then the rising energy prices today could fuel price dynamics again in the coming months, and if China manages to fuel growth thanks to ample monetary and fiscal stimulus, the impact on global inflation could be felt. And if you listen to Richmond Fed's Thomas Barkin, that's exactly what comes out: 'if you back off too soon, inflation comes back stronger'. But the possibility of two more rate hikes following the most aggressive hiking cycle from the Fed starts looking a bit stretched with the actual data. Due to release today, the US producer price inflation is expected to have fallen to the lowest levels since the pandemic, we could even see some deflation.   And a potential Chinese boost to inflation looks much less threatening today compared to a couple of months ago. Chinese exports plunged 12.4% in June, worse than a 7.5% drop printed in May and worse than the market forecasts of a 9.5% decline. The June decline in Chinese exports marked the steepest fall in sales since February 2020. Deteriorating foreign demand on the back of high inflation and rising interest rates continued taking a toll on Chinese trade numbers. In the meantime, imports fell 6.8%, the fourth straight month of decrease due to persistently weak domestic demand.   China will likely recover at some point, but we will unlikely see the Chinese growth put a severe pressure on commodity markets. That's one good news for inflation watchers. The other one is that the US student loan repayments will resume from October, and that should act as a restrictive fiscal action, and help the Fed tame inflation. Therefore, even though there could be an uptick in inflation figures in the coming months, we will unlikely see inflation spike back above 4-5% again. But we will also unlikely to see it fall to 2% easily.  

Asia Morning Bites The RBA is to get a new Governor, Michelle Bullock, in September. In the US, James Bullard will step down from the St Louis Fed. More disinflationary pressure from June PPI data helps stocks to rally and the USD and US treasury yields to slide.   Global Macro and Markets Global markets:  Further disinflationary signs from US PPI data yesterday helped US Treasury yields to drop sharply. 2Y yields fell 11.6bp to 4.63%, while 10Y yields fell 9.4bp to 3.763%. This probably helped to spur further USD weakness. At 1.1224, it does really look as if the long-awaited USD turn has arrived. We haven’t seen levels like this since March 2022.  The AUD also made solid gains against the USD, rising to 0.6890. Cable too has surged, rising to 1.3131, and the JPY has plunged below 140 to 137.96. All Asian currencies were stronger against the USD yesterday, and it looks like a fair bet that this will be the theme in trading this morning. US stocks also seemed to like the additional disinflationary message from the PPI numbers. The NASDAQ rose 1.58% while the S&P500 rose 0.85%. Chinese stocks were also positive. The Hang Seng rose a very solid 2.6% while the CSI 300 rose 1.43%.   G-7 macro: US PPI rose just 0.1% MoM in June for both the headline and core measures. This resulted in a final demand PPI inflation rate of just 0.1%YoY, though the ex-food-and-energy PPI inflation rate was 2.4%YoY, down from 2.6% in the prior month. Initial jobless claims were a little lower though, so we shouldn’t get too carried away with the disinflationary theme.  Today, the US releases import and export price data, which should also indicate falling pipeline prices The University of Michigan confidence publication will also throw some light on inflation expectations, which are forecast to come down slightly on a 1Y horizon. There is May trade data out of the Eurozone. In Fed news, James Bullard, one of the FOMC hawks, and in this author’s view, one of the most thought-provoking and consensus-challenging members of the FOMC, is to step down to pursue a career in academia. Shame.  Meanwhile, Christopher Waller has said the Fed will need two more hikes to contain inflation because the negative impact of the banking turmoil earlier in the year has faded. Markets don’t agree.     Australia:  According to a Bloomberg article, the Reserve Bank of Australia’s Governor, Philip Lowe, will not be reappointed when his 7-year term ends on September 17. This may not come as a massive surprise following an independent review of the central bank, which criticized some of the RBA’s forward guidance on rates during Covid and the pace of the response to higher inflation. Lowe will be replaced by Michele Bullock, who is currently Deputy Governor.   China:  June FDI data is due anytime between now and 18 July. The last reading for May showed utilized FDI running almost flat from a year ago. Given the run of recent data, it is conceivable that we see a small negative number for June, indicating net FDI outflows.   India: Trade data took a sharply negative turn in May, and today’s June numbers, while likely to show exports still falling from a year ago, may have moderated slightly from the -10.3%YoY rate of decline in May. The trade deficit could shrink slightly from the May $22.12bn figure.     Singapore: 2Q GDP surprised on the upside and settled at 0.7%YoY compared to 1Q GDP growth of 0.4%YoY.  The Market consensus had estimated growth at 0.5%YoY. Compared to the previous quarter, GDP was up 0.3% after a 0.4% contraction in 1Q23. The upside surprise to growth may have been delivered by retail sales, with department store sales and recreational services supported by the return of visitor arrivals. Services industries as a whole expanded 3%YoY, much faster than the 1.8% gain reported in 1Q.  The rest of the economy, however, continues to face challenges with manufacturing down 7.5%YoY, tracking a similar downturn faced by non-oil domestic exports as global demand remains soft.    What to look out for: China FDI, India trade and US University of Michigan sentiment China FDI (14 July) Japan industrial production (14 July) India trade (14 July) US import prices and University of Michigan sentiment (14 July)

Poland: Industrial output decreases YoY in June Industrial output (June): -2.2% YoY We forecast that industrial production remained in the red in June, falling for the fifth consecutive month in annual terms. Last month’s PMI report points to a further sharp deterioration in new orders, particularly from Germany, which suggests that weakness in Poland’s manufacturing activity is likely to continue in the near term. On a positive note, capital goods manufacturing has remained solid recently, giving reason to expect further growth in fixed investment. PPI (June): 1.3% YoY Rapid disinflation in producer prices likely continued in June and annual growth is trending towards negative figures. In monthly terms, PPI has been falling since February this year and prices in manufacturing have been declining in MoM terms since November last year. Given the high reference base, this has led to a rapid drop in annual wholesale inflation. June's PMI report showed that the downward pressure on manufacturing prices remains strong. In the second half of 2023, we expect producer prices to be lower than in the second half of 2022. Retail sales (June): -5.5% YoY We forecast that retail sales of goods fell again in June as the broad-based decline in consumption demand continued. Higher prices and a deterioration in the real purchasing power of households trimmed spending. According to our estimates, 2Q23 was the third consecutive quarter of annual decline in private consumption in Poland. Some improvement should be visible towards the end of this year as CPI inflation moderates and real wage growth returns. Wages (June): 12.1% YoY Nominal wage growth stabilised at low double-digit levels and swings along additional payments in mining and energy sectors. We project wage pressure to continue over the medium term despite some deterioration in economic activity. Demographic trends are curbing the supply of labour and the gap has mostly been filled with immigrants. On top of that, the government has pursued sharp increases in minimum wages recently. In 2024, the minimum wage is proposed to go up by more than 20%. Employment (June): 0.4% YoY The level of employment in the enterprise sector has been moderating slightly in recent months and annual growth remains low. A cooling in manufacturing has reduced the demand for workers in some sectors. At the same time, unemployment remains at very low levels and the supply of labour is limited.

US Q2 GDP – 27/07  one of the key themes this week has been the resilience of the US economy, despite the sharp rise in rates over the last 12 months. Notably the resilience of the labour market has surprised with little sign of a slowdown on hiring, while inflation has been slowing quite sharply. This has helped consumers stay resilient with a solid rebound in personal consumption in Q1 to 4.2% after a weak end to last year. This rebound in consumer spending helped Q1 GDP get revised up from 1.2% to 2% in the final revision of Q1 GDP. The key test in this week's first iteration of US Q2 GDP will be whether this momentum was maintained. Judging by recent consumer confidence numbers, spending patterns and a resilient labour market there is little reason to suppose otherwise, although manufacturing is likely to be a weak spot. It's also worth keeping an eye on inventories to see whether these are being maintained, or being run down. 

Eurozone PMI suggests worsening economic conditions The eurozone PMI suggests contracting economic activity at the start of the third quarter. Overall, this fits a trend of weakening survey indicators over recent months and increases the recession risk for the bloc. The survey continues to suggest moderating price pressures, but the impact of wages on services will remain a concern for ECB hawks. Survey data became progressively bleaker during the second quarter and the July PMI continues that trend. The June composite PMI stood at 49.9, broadly signalling stagnation, but in July the PMI dropped to 48.9, indicating contraction. Demand in the eurozone is falling for both goods and services according to the survey, with services new orders dropping for the first time in seven months while the decline in new orders for manufacturing steepened further. France and Germany look particularly bleak with output PMIs signalling contraction, which is offset slightly by the rest of the eurozone. We don’t have more details yet, but this could be due to more tourism-dependent economies profiting from a somewhat stronger summer period. Still, the positive tourism effect doesn't seem strong enough to counter weakening in the economy elsewhere. We have previously argued that the eurozone economy has been in a stagnation-type environment, and the recent two quarters of minimal negative GDP growth should not be taken as a broad recession given the strength of the labour market. The July PMI suggests that recession risk has increased though. With expectations of output weakening further, the outlook for the coming months is sluggish at best. The inflation picture coming from the survey is very similar to recent months. Price pressures are cooling, but more so for goods manufacturers than services providers. Rising wages continue to keep price pressures elevated for services, resulting in a slower downward trend. Dropping input costs are helping to bring inflation expectations down much faster for goods at the moment. This confirms our view of a materially lower inflation rate towards the end of the year but keeps hawkish concerns about the effect of wages on inflation alive.

Asia Morning Bites Politburo pledges support for China's economy - we await detailed plans.   Global Macro and Markets Global markets:  US equity markets made small gains yesterday, though the price action was far from conclusive. The S&P settled 0.4% higher than the previous day while the NASDAQ rose just 0.19%. Chinese stocks fell. The Hang Seng was down 2.13% and the CSI 300 fell 0.44%. That might change today after a Chinese Politburo meeting yesterday vowed to provide more aid for the property sector as well as boost consumption and tackle local government debt issues. Equity futures are positive, but we will reserve judgement until we hear some details. We have had plenty of vague promises already, which don’t amount to a great deal so far. US Treasury yields seem to have decided that this week’s FOMC meeting will be hawkish, and 2Y yields jumped up 8.2bp to 4.919% yesterday. The yield on 10Y bonds rose just 3.8bp to 3.872%. EURUSD fell again yesterday, dropping to 1.1063. The AUD was flat at 0.6734, Cable dipped to 1.2816, and the JPY remained stable at 141.59. Asian FX didn’t move much yesterday. The TWD fell 0.39% after industrial production fell slightly more than expected. At the other end of the spectrum, the KRW made gains of 0.28%. The CNY was unchanged. G-7 macro:  PMI data yesterday was weaker across much of the Eurozone, and the aggregate composite PMI dropped a full point to 48.9, with very weak manufacturing (42.7 from 43.4) and a slowdown in service sector growth (51.5 from 53.7). The equivalent US series showed a smaller manufacturing contraction (49.0) but also showed service sector growth slowing (52.4 from 54.4). Today, Germany’s Ifo survey will add more detail on the German situation. The US releases house price data (S&P CoreLogic numbers as well as FHFA data). And the US Conference Board releases its July confidence data. South Korea: Korea’s real GDP rose 0.6% QoQ sa in 2Q23 (vs 0.3% in 1Q23, 0.5% market consensus). 2QGDP was up from the previous quarter and slightly higher than the market consensus, but the details were quite disappointing. Net exports contributed to the growth (+1.3pt) but it was mainly because the contraction of imports (-4.2%) was deeper than that of exports (-1.8%). Looking ahead, we think that GDP in 2H23 will slow down again, as forward-looking data for domestic demand indicates a further deterioration. Please see our 2H23 outlook details here.  We think today’s data should be a concern for the Bank of Korea as exports remain sluggish amid expectations of a further worsening of domestic growth. Also, this year’s fiscal support is likely to remain weak, considering the tax revenue deficit and normalization of covid related fiscal spending. Thus, the BoK’s policy focus will gradually shift from inflation to growth over the next few months as we expect inflation to stay in the 2% range most of the time in 2H23. Indonesia:  Bank Indonesia meets today to decide on policy.  BI is widely expected to keep rates untouched at 5.75% to help shore up the IDR and ensure FX stability.  Previous dovish comments from BI Governor Warjiyo suggesting rate cuts could be considered have been set aside for now and we could see an extended pause from BI with any rate cut only considered later on.     What to look out for: Central bank decisions Bank Indonesia policy meeting (25 July) Hong Kong trade (25 July) US Conference board consumer confidence (25 July) Australia CPI (26 July) Singapore industrial production (26 July) US new home sales (26 July) US FOMC decision (27 July) China industrial profits (27 July) ECB policy decision (27 July) US personal consumption, durable goods orders initial jobless claims (27 July) South Korea industrial production (28 July) Japan Tokyo CPI and BoJ policy (28 July) Australia PPI (28 July) US personal spending, core PCE, University of Michigan sentiment (28 July)

Korea: 2Q23 GDP improved but with disappointing details South Korea’s real GDP accelerated to 0.6% QoQ (sa) in 2Q23 from 0.3% in 1Q23, which was slightly higher than the market consensus of 0.5%. However, the details were quite disappointing with exports, consumption, and investment all shrinking. We expect growth to slow in 2H23.   Net exports contributed positively to overall growth The upside surprise mainly came from a positive contribution from net exports (+1.3pt). However, we do not interpret this in a positive light, because it was not driven by an improvement in exports, but rather by a contraction of imports (-4.2%), which was deeper than that of exports (-1.8%). By major item, exports of vehicles and semiconductors rose as global supply conditions improved and global demand remained solid. But, exports of petroleum/chemicals and shipping services declined further with unfavourable price effects weighing. Falling commodity prices have had a positive impact on Korea's overall terms of trade, having a greater impact on imports, but "processed" exports such as petroleum/chemicals and shipping took more of a hit.   Net exports led growth but due to sharper decline of imports than exports   Meanwhile, domestic demand dragged down overall growth by -0.6pt As monthly activity and sentiment data already suggested, private consumption was down -0.1% with declining service consumption, while investment – both construction (-0.3%) and facilities (-0.2%) – contracted. Also, government expenditure dropped quite sharply (-1.9%) as spending on social security declined. We believe that the reopening boost effects on consumption have finally faded away, while tight credit conditions have also dampened investment. R&D investment (0.4%) was an exception, rising for the second consecutive quarter on the back of continued investment in new technologies.   GDP in 2H23 will likely decelerate again Forward-looking data on domestic demand indicates a further deterioration in domestic growth. Construction orders, permits, and starts have been declining for several months, while capital goods imports and machinery orders have also trended down recently. With continued market noise surrounding project financing and growing uncertainty over global demand conditions, business sentiment for new investment is very weak. This year’s fiscal spending will also not support the economy meaningfully, considering the tax revenue deficit and normalization of covid related spending. However, we think trade will take the lead in a modest recovery. We believe that exports will rebound by the end of the third quarter with support from improved vehicle demand, semiconductors, and machinery (despite the global headwinds). Please see our 2H23 outlook details here.   Korea's GDP is expected to slow down in 2H23     Although 2Q23 GDP was higher than expected, the details suggest a weaker-than-expected recovery in 2H23, together with weak forward-looking data, thus we keep our current annual GDP forecast for 2023 unchanged at 0.9% YoY.   The Bank of Korea watch We think today’s data should be a concern for the Bank of Korea (BoK). The BoK forecast growth to accelerate in 2H23 on the back of better exports. We agree that export conditions will improve, but we don't think they will be strong enough to dominate weak domestic growth, and today’s data also suggests that growth will slow down in the near future. Thus, the BoK’s policy focus will probably gradually shift from inflation to growth in 4Q23. In 3Q23, we believe that the BoK will continue to keep its hawkish stance while keeping a close eye on other major central banks’ monetary policies. Also, inflation may fluctuate a bit over the Summer season due to soaring fresh food prices amid continued severe weather conditions. However, if inflation stays in the 2% range for most of 2H23, then the BoK’s tone should shift to neutral and eventually revert to an easing cycle.

Fed, ECB and BoJ all meet this week Weak PMIs point to further cooling in the economy NAS100 nears channel lows  Equity markets are treading water at the start of what is going to be a very lively week. There are some huge central bank meetings this week, the most notable naturally being the Federal Reserve on Wednesday. Interest rates are finally at or very close to their peaks and this week could see the Fed and ECB announce the last rate hike in their tightening cycles. And a look at the PMI data may help to explain why, with economies around the world cooling at a decent rate. Inflation is also falling, primarily driven by favourable base effects at this stage, as well as falling energy prices and decelerating food costs. The PMIs from the eurozone, the UK, and the US today all tell a pretty similar story. Manufacturing is continuing to struggle – although not as much as expected in the US – while services growth expectations are slowing. There are clear signs in the surveys of more cooling on the horizon, fewer inflationary pressures, and weaker hiring. Central banks will be relieved, though almost certainly not enough to claim victory or explicitly declare the end of the tightening cycle. Policymakers will proceed with extreme caution, albeit very much buoyed by the data they’ve seen over the last month or two.     NAS100 nears channel lows ahead of the Fed The NAS100 pulled back over the last couple of sessions after coming close to 16,000, a level it hasn’t traded at since the start of last year. It was previously a notable level of support and resistance as well, which may explain why we’ve seen some profit-taking. It’s now pulled back to 15,250-15,500 where it saw plenty of resistance over the last couple of months and now coincides with the bottom of the rising channel. A break of this could be a bearish development after such a strong recovery this year.      

Surprisingly strong second quarter growth in France French GDP grew by an above-consensus 0.5% in the second quarter on the back of strong exports, while domestic demand contracted. The third quarter started on a weaker footing.   Exports drive French growth, while consumption contracts French GDP expanded by 0.5% in the second quarter, significantly above the 0.1% consensus expectation. This was surprising, given the social unrest in the quarter and rather subdued sentiment indicators. However, domestic demand still contracted by 0.1% on the back of a 0.4% fall in consumption and a 1.6% decline in residential construction. The 0.7% growth in business investment was unable to compensate for this. On top of that, the ongoing inventory correction subtracted another 0.1 percentage point from growth. So, growth was entirely due to external demand, with exports advancing by 2.6%, while imports grew by 0.4% on the quarter. The recovery in the car industry probably boosted exports, though there was also the delivery of a cruise ship, which pushed up exports of transport equipment by 11.2% after +1.8% growth in the first quarter. Also, the continued reopening of nuclear power plants has made France a net exporter of electricity again.   Weak start to the third quarter While today’s figure is definitely a pleasant surprise, it remains to be seen whether this dynamic growth can be maintained. The third quarter might get a boost from a normalisation of tourism income after the more subdued Covid-19 years. However, according to the July PMI figures, the French economy started the third quarter of 2023 with the sharpest reduction in business activity since November 2020, with sentiment in both the manufacturing and services sectors below the 50-point boom-or-bust level. We, therefore, expect a deceleration of the growth pace in the second half. That said, on the back of the stronger-than-expected first half, we might have to revise our 2023 GDP growth forecast (now standing at 0.5% for the year) slightly upwards.   Inflation on a downward trend In another report published today, it appeared that consumer price inflation fell to 4.3% in July, from 4.5% in June, with the HICP inflation figure dropping from 5.3% to 5.1%. While French inflation remains higher than the eurozone average, on the back of a different dynamic in energy prices (since prices were capped in France last year, the downward impact of lower market prices is less pronounced in France than in other countries), the trend is downwards. That said, the July PMI survey showed a clear difference between manufacturing and services. Manufacturing prices have been falling for some months thanks to declines in raw material costs, but service prices continue to rise at a still highly elevated pace, presumably driven by higher labour costs. This is a phenomenon which is quite similar in the rest of the eurozone and which will make the discussions on the pace of decline in core inflation all the more lively at the next ECB’s governing council meeting.

Polish PMI dips in July on falling new orders Poland's manufacturing PMI fell to 43.5pts in July, down from 45.1pts in June, the lowest level since mid-2022, when the domestic economy struggled with the effects of rising energy prices, among other factors. The assessment of current production, orders, employment and purchases all worsened in July from the previous month.   The most significant thing to note from this data release is the deteriorating assessment of the acquisition of new orders (the worst ratings in eight months), especially for exports (the weakest performance since May 2020). This was followed by a decline in current production, the fastest since November 2022 and the fifteenth consecutive month of decline. We are most likely seeing the effects of economic weakness in the eurozone, especially in Germany (the industrial PMI there is below 40pts). Around 50% of Polish industry products go to foreign markets, and Germany is Poland's main trading partner. Planned employment decreased for the fourteenth month in a row. This can be seen in the CSO's employment data, where manufacturing accounts for much of the decline. In June, for example, the business sector lost about 5,000 full-time jobs, of which 3,000 were in manufacturing. Companies also reduced purchasing activity and sought to reduce inventories. In our view, this will translate into relatively weak imports. In addition to energy commodity prices, this should sustain Poland's trade surplus despite the weak export outlook.   Manufacturing PMI in Poland and Germany External demand affects the Polish industry   The bright spot is rapidly decreasing price pressure. The lack of demand has again pushed prices down. Input costs have fallen at the strongest rate since the survey began more than 25 years ago. This was helped by declines in raw material prices and/or the strengthening of the zloty. Selling prices also fell at the fastest pace ever. More than 27% of respondents reduced their prices during the month. While there are signs of stabilisation in domestic industrial production data, recent PMI reports suggest a cautious approach to expectations of a marked improvement in the sector's condition in the second half of the year. Manufacturing is seeing a marginal rebound in the US, Asia, and sluggishly in China, but not in Europe. We think the PMIs for Poland (and elsewhere) are much more pessimistic than real trends in activity (see graph), but other anecdotal evidence we collect has not provided positive signals so far.

Eurozone Q2 GDP returned to growth with a 0.3% advance reading (prior revised higher to 0.0%). Eurozone core inflation held steady at 5.3% Stocks have a flat session as traders await NFP Friday US stocks are wavering ahead of a key Fed survey that should show loan growth is weakening and that the economy should steadily weaken.  The Senior Loan Officer Opinion Survey (SLOOS) will tell us how top lending officers feel about the credit outlook. The US dollar isn’t making any major moves as Wall Street grows more confident that a soft landing is very much obtainable.  Many traders won’t do much positioning until Friday’s NFP report, which should show the labor market remains tight.  The key for the payroll report might be what is happening with wages, as it seems fears of an acceleration of inflation have been downsized.  This week also includes the ISM reports which should show manufacturing activity is picking up and the service sector is cooling.  Weakening growth prospects is not the takeaway from this earnings season, but that could change if Apple and Amazon’s results tell a different story.      The euro remains heavy as concerns grow for Germany’s outlook.  German economy minister warned of five tough years and that bleak outlook could weigh on the euro.  EUR/USD might start to form a narrow trading range but that could change once we get beyond the NFP report.  It seems everyone is in wait-and-see mode and right now the US jobs report will steal the spotlight. The 1.0950 to 1.1050 could emerge as the key trading range until this week’s fireworks. US Data Both the ISM Chicago PMI and Dallas Manufacturing survey showed activity improved for a second consecutive month.  The Chicago PMI was softer-than-expected but has yet to benefit from increasing aircraft orders.  The Dallas Fed did not provide an inspiring outlook as activity remains sluggish, while prices paid and received rose.  The manufacturing part of the economy is still in contraction territory and the recovery will likely be unbalanced.   

NZD/USD is down 1% China’s Caixin Mfg. PMI contracted in July The New Zealand dollar continues to show sharp volatility early in the week. In Tuesday’s European session, NZD/USD is trading at 0.6142, down 1.06%. The decline has wiped out the gains the New Zealand dollar made on Monday when it rose 0.85%. China’s Caixin Mfg. PMI declines China’s recovery has been bumpy, and this week’s PMIs didn’t bring any good news. The Caixin Manufacturing PMI for July declined for the first time in three months, falling from 50.5 to 49.2 and missing the consensus estimate of 50.3 points. On Monday, the official PMIs pointed to weak activity, with manufacturing coming in at 49.3 and non-manufacturing at 51.5 points. The 50.0 line divides expansion from contraction. The weak Caixin Manufacturing PMI has sent the New Zealand dollar sharply lower on Tuesday. China is a key trading partner for New Zealand and the New Zealand dollar is sensitive to Chinese economic releases. New Zealand’s labour market has been tight, which has interfered with the central bank’s efforts to bring inflation back to the 2% target. We’ll get a look at the second-quarter employment report on Wednesday, and the data may not be to the Reserve Bank’s liking. Employment Change is expected to rise by 0.5%, compared to 0.8% in Q1. The unemployment rate is projected to inch higher to 3.5% in the second quarter, up from 3.4% in the first quarter. There aren’t many tier-1 releases ahead of the Reserve Bank’s meeting on August 16th, which makes Wednesday’s employment report doubly important. If, as expected, the data shows that the labour market is robust, it will support the Reserve Bank raising rates. Conversely, a weak employment report would be a reason for the central bank to take a pause from raising rates. In the US, the manufacturing data reaffirmed weakness in the sector. The ISM Manufacturing PMI for July improved from 46.0 to 46.4 but missed the estimate of 46.8. ISM Manufacturing Employment slipped to 44.4, down from 48.1 and shy of the estimate of 48.0 points.     NZD/USD Technical NZD/USD has pushed below support at 0.6184. Below, there is support at 0.6093 0.6246 and 0.6337 are the next resistance lines  

German Factory Orders jump 7.0% US nonfarm payrolls expected to dip to 200,000 The euro is almost unchanged on Friday, trading at 1.0952. We could see some movement in the North American session, with the release of US nonfarm payrolls. The euro has shown sharp swings lately.  EUR/USD climbed to 1.1275 on July 18th, its highest level since February 2022. It has been all downhill since then, with the euro tumbling over 300 basis points.   Soft German PMIs reflective of weak eurozone economy It hasn’t been the best week for Germany, the largest economy in the eurozone and the bellwether of the bloc. The July PMIs pointed to deceleration in both services and manufacturing. The Services PMI remained in expansion territory but slipped from 54.1 to 52.3, its lowest level since February. Manufacturing is in terrible shape, with the PMI falling from 40.6 to 38.8, its weakest reading since May 2020. German retail sales declined 0.8% in June, down from 1.9% in May. The week did end with some good news, as German Factory Orders jumped 7.0% m/m in June, up from 6.2% in May and blowing past the consensus estimate of -2.0%. We’ll get a look at German Industrial Production on Monday and CPI on Tuesday. For the ECB, the weak numbers out of Germany are an indication that the central bank’s tightening cycle is working, but what comes next is a tricky question. Inflation has slowed to 5.5%, but that is much higher than the 2% target. The ECB hasn’t paused its rate hikes since the tightening cycle began in July 2022 but there is some pressure on the ECB to take a break at the September meeting in order to avoid a recession. ECB President Lagarde is keeping mum, saying that a pause or a hike are both on the table. With no guidance from the ECB, about all investors can do is keep an eye on inflation and employment releases, which will be crucial to the ECB’s decision at the next meeting.   Markets expect soft US nonfarm payrolls All eyes are on nonfarm payrolls, one of the most important US releases. In June, a massive ADP employment report fuelled expectations that nonfarm payrolls would also soar. In the end, nonfarm payrolls fell to 209,000, down sharply from a downwardly revised 306,000. ADP again soared this week with a reading of 324,000. We’ll have to wait and see if nonfarm payrolls come in around the consensus estimate of 200,000 or follow ADP and move sharply higher. . EUR/USD Technical 1.0924 remains under pressure in support. Below, there is support at 1.0831 There is resistance at 1.1037 and 1.1130  

The Australian dollar’s slide continues Evergrande bankruptcy raises contagion fears It has been all red for the Australian dollar, as AUD/USD has closed lower for eight straight days and declined 230 basis points during that time. The downswing has continued on Friday, as AUD/USD is trading at 0.6390 in the European session, down 0.20%. There are no Australian or US releases today, so I expect a calm day for AUD/USD.   Evergrande collapse raises contagion fears Chinese economic releases have looked weak in recent weeks, with exports and imports in decline, a slump in domestic demand, and soft services and manufacturing data. The news from Evergrande, one of the country’s largest property developers, is one more headache that the Chinese economy could do without. Evergrande filed for bankruptcy in New York on Thursday. The company defaulted on its massive debt in 2021, which triggered a massive property crisis in China and damaged the country’s financial system. The bankruptcy has raised fears that China’s property sector problems could spread to the rest of the economy, which is experiencing deflation and is suffering from weak growth. There are growing concerns about the stability of the Chinese economy and the Evergrande bankruptcy has raised contagion fears, similar to when the company defaulted on its debt. Australia is particularly sensitive to economic developments in China, which is Australia’s largest trading partner. A slowdown in China has meant less demand for Australian exports, and that has contributed to the Australian dollar’s sharp slide, with the currency plunging a massive 4.93% in August.   In the US, there was unexpected good news from the manufacturing sector on Thursday. Manufacturing has been in the doldrums worldwide, as high inflation and weak demand have taken a heavy toll. The US is no exception, but Philly Fed Manufacturing sparkled in August with a reading of +12, up sharply from -13.5 in July and blowing past the consensus estimate of -10 points.   AUD/USD Technical AUD/USD is testing support at 0.6402. This is followed by support at 0.6319 0.6449 and 0.6532 are the next resistance lines    

Poland's industrial production and producer prices fall sharply in July July industrial production fell by 2.7% year-on-year, well below the consensus forecast of 0.6%. There were yearly declines in all four major commodity groups, double-digit drops in mining and quarrying of 10.2%, and in manufacturing by 2.4%. Producer price deflation was deeper than expected, with July PPI falling 1.7% YoY against a consensus of -1.2%.   Poland's industry saw a surprisingly weak start to the third quarter, although this coincided with dismal industrial PMI readings in Poland (43.5pts in July) and Germany (below 40pts in July). Year-on-year declines in industrial production in July were recorded in 24 of 34 industrial production divisions, the deepest in coal and lignite mining (by 27.7%), chemical products (9.6%), wood products (15.5%), paper (11.5%), metals (10.4%), and other non-metallic products (8.8%). The 10 divisions that saw an increase in production were led by machinery and equipment repair (up 20.7%), motor vehicles (15.0%), other transport equipment (8.1%) and machinery and equipment (4.9%). Production’s positive growth was driven by pro-export sectors. The deep fall in PPI producer prices was largely due to the statistical base effect and clearly lower energy prices than a year ago, but also reflected weakness in demand. A similar picture emerged from Germany's July PPI reading. On a monthly basis, Polish manufacturing prices have been falling since November, and we expect PPI deflation to continue at least until the end of the year, which should facilitate further CPI disinflation. Available leading indicators (PMIs, new orders data) do not suggest a rapid recovery in manufacturing, although the most acute phase of inventory reduction by Polish companies seems to have passed. This week the preliminary August PMIs for the eurozone and Germany will be published; our forecasts do not assume a significant improvement compared to July. The economy of Poland’s largest trading partner is balancing between stagnation and recession. We expect that industrial production in Poland will remain low in the third quarter and experience a more visible rebound in the fourth quarter.   Poland's industrial production, YoY changes, in %

05:40BST Wednesday 23rd August 2023 Flash PMIs set to weaken further in August   By Michael Hewson (Chief Market Analyst at CMC Markets UK)     The FTSE100 managed to finally break its worst run of losses since 2019 yesterday, posting its first daily gain since the 10th August. The gains were hard-won however with the index trying retreating from its daily highs and failing for the second day in a row to consolidate a move above 7,300. The rest of Europe managed to do slightly better, outperforming and closing higher for the 2nd day in a row, although still closing well off the highs of the day.       US markets on the other hand after starting strongly slipped back after European markets had closed, sliding back on comments from Richmond Fed President Thomas Barkin who said the Fed needed to be open to the prospect the US economy might re-accelerate which might mean the central bank might need to hike rates further and keep them higher for longer, pushing the US dollar to its highs for the day in the process. Despite the weaker finish for US markets, the resilience in Asia markets looks set to see European markets open slightly higher later this morning.  The last set of flash PMIs saw German manufacturing slide to its lowest levels since the Covid lockdowns at 38.8 in further signs that the engine of the German economy continues to stutter. Weak demand in its key export markets as well as domestically, along with higher energy prices weighing on economic activity.       The only bright spot was services which came in at 52.3, but even here economic activity was slower, and both sectors are expected to weaken further in August further complication the task of the ECB which is expected to signal a pause in its rate hiking cycle next month. Manufacturing activity is expected to soften further to 38.6, while services is expected to slip to 51.5. Economic activity in France was also disappointing in July, although the underperformance was more evenly distributed with both manufacturing and services both in contraction heading into Q3. Manufacturing slipped to 45.1 in July and services dropped to 47.1. With energy prices rising sharply over the last few weeks, it's hard to imagine a scenario that will see a significant improvement given the weakness seen in China and other overseas markets. Manufacturing is forecast to come in at 45, and services at 47.5.     While economic activity has been slowing in Europe, the UK has also seen similar slowdowns in both manufacturing and services, although the composite PMI is just about hanging on in expansion territory, unlike its peers across the Channel.     Construction has been a notable strong point, however the focus today is on manufacturing which slowed to 45.3 in July, while services slowed from 53.7 in June to 51.5 in July. The recent GDP numbers for June showed a strong performance, however Q3 is likely to be much more challenging, with higher oil and gas prices likely to filter through at the petrol pump. UK manufacturing is expected to slow to 45, and services to 51.     US manufacturing and services look set to be more resilient at 49 and 52 respectively.      EUR/USD – continues to find support just above the 1.0830 area. Below 1.0830 targets the 200-day SMA at 1.0790 and trend line support from the March lows at 1.0750. Still feels range bound with resistance at the 1.1030 area.     GBP/USD – failing at the 50-day SMA again and the 1.2800 area. We need to see a move through the 1.2800 area, to signal potential towards 1.3000. A break below 1.2600 targets 1.2400.           EUR/GBP – sinking towards support at the 0.8520/30 area. A move below 0.8500 could see 0.8480. Above the 100-day SMA at 0.8580 targets the 0.8720 area.     USD/JPY – failed to push above the 146.50 area yesterday,but while above the 144.80 area bias remains for a move towards 147.50. Below the 144.80 area, targets a move back to the 143.10 area.     FTSE100 is expected to open 10 points higher at 7,280     DAX is expected to open 42 points higher at 15,747     CAC40 is expected to open 14 points higher at 7,255

EUR: ECB cannot ignore PMIs Any forward-looking economic indicator is, at this stage, quite important for the euro and the European Central Bank. The bank is officially fully focused on inflation, but evidence of a slowdown in key parts of the euro area has mounted and is now too blatant to be overlooked. Core inflation dynamics will still remain the main input for the ECB – but should we see more indications from today’s PMIs that the eurozone outlook is deteriorating, then policymakers might see the window for one last hike closing rapidly and opt for a September hike rather than delaying it until the fourth quarter.  The focus will also be on Germany’s PMIs. Manufacturing is expected to have flattened in August at 38.8, and services to have declined modestly to 51.5. Overall, the eurozone numbers are not expected to show any further material deterioration. Later today, the euro area consumer confidence will also be published. EUR/USD came under pressure yesterday and unless we receive some encouraging news from PMIs, or a drop in the dollar (e.g., caused by an equity rally after Nvidia results), we suspect markets may marginally prefer to stay bearish on the pair as for some pre-Jackson Hole positioning.   EUR/USD is testing the early-July 1.0834 low this morning, a break lower puts the next support at 1.0800 (200-day MA).

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

Euro falls below 1.08 for first time since June Fed’s Harker says interest rates may have peaked The euro has extended its losses for a second straight day. In the European session, EUR/USD is trading at 1.0785, down 0.23% and falling below the 1.08 line for the first time since June. Later today, Germany’s Business Climate is expected to ease for a fourth straight month. It has been a nasty slide for the euro, which has been unable to find its footing and has plunged a staggering 500 points over the past six weeks. EUR/USD is down 0.80% this week, in large part due to soft eurozone manufacturing and services PMI readings on Wednesday. The eurozone economy has been damaged by the war in Ukraine and Germany, known as the locomotive of Europe, is in trouble as well. The deterioration of China’s economy is more bad news for the eurozone’s export sector. The ECB’s rate-tightening cycle, aimed at curbing high inflation, has also dampened economic activity. Lagarde & Co. have a tricky task in charting out a rate path. If rates remain too low, inflation will remain well above the 2% target. However, too much tightening raises the risk of tipping the weak eurozone economy into a recession. Lagarde has a difficult decision to make and the markets are uncertain as well – ECB rate odds for the September meeting are around 50-50 between a hike or a pause. Harker says Fed could be done Investors are anxiously awaiting Jerome Powell’s speech at Jackson Hole later today. Meanwhile, Philadelphia Federal Reserve Harker made headlines on Thursday when he said that the Fed may have reached the end of its current rate-tightening cycle. Harker said that he didn’t see a need to raise rates further “absent any alarming new data between now and mid-September”.   At the same time, Harker stressed that he expected rates to remain at high levels for “a while” and ruled out rate cuts anytime soon. This was a pointed message to the markets not to assume that rate cuts are just around the corner.  I expect Fed Chair Powell to be even more cautious in today’s speech, perhaps with a reminder that inflation remains above target and that the door is still open to further tightening.   EUR/USD Technical There is resistance at 1.0893 and 1.0940 EUR/USD has support at 1.0825 and 1.0778    

Italian business confidence falls in August The deterioration in confidence is more marked in industry and construction, but services are not immune either. Consumers remain relatively upbeat, possibly helped by a resilient labour market. This all points to a stagnating economic environment.   Consumers remain relatively upbeat Consumer confidence only slightly edged down to 106.5 in August (from 106.7 in July). The deterioration in the perception of the current and future economic climate contrasts with the improvement in personal circumstances. We believe this has to do with the combination of declining inflation and a very resilient labour market. Indeed, the unemployment expectation component of the survey slowed down on the month. When matching this with an increase in the current opportunity to save sub-index, we sense that a possible stabilisation in the savings ratio might be in the making, limiting the scope for a strong pick-up in private consumption, at least in the short term.   Manufacturing confidence softens further On the business front, confidence unsurprisingly declined again among manufacturers to 97.8 (from 99.1 in July), the lowest level since January 2021. Here, softer orders coupled with a stable inventory component resulted in a decline in the production expectation component. Softer demand in key export destination countries such as Germany and, to a smaller extent, China, is apparently taking its toll, with the domestic component unable to compensate. Interestingly, the investment goods segment seems less affected, suggesting that some demand linked to the implementation of the Recovery and Resilience Facility might still be in place.   Construction confidence fall suggests that the effect of tax incentives is fading The six-point decline in the construction confidence index to 160.2 (from 166.5 in July) sends a warning signal. While the index remains close to its historical highs, the push coming from the residential component is gradually fading as generous tax incentives come to an end. While the existing backlog of orders related to incentives looks set to keep the sector afloat into year-end, the exceptionally high contribution of construction investment to GDP growth looks set to vanish in 2024.   Services only marginally down, with tourism relatively weak Confidence in market services fell to 103.6 in August, from 105.5 the previous month. The decline affected all big aggregates, except information and communication. Interestingly, it also affects tourism services, where an improvement in the current affairs component contrasts with declining order expectations. This broadly fits with other evidence available pointing to a good summer tourism season.      Modest GDP growth in the second quarter still possible All in all, today’s confidence data suggest that conditions are still ripe for the continuation of a soft economic environment. After the disappointing 0.3% GDP contraction in the second quarter (we will get the full details for this on Friday), a very small rebound still looks possible in the third quarter. Whether this will materialise or not will depend on whether services are strong enough to compensate for industrial weakness. We still hold average Italian GDP growth of 1% in 2023 as our base case.

Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  

Jobs day!  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   August ended on a downbeat note for the S&P500 and on an upbeat note for the US dollar as, even though the Federal Reserve's (Fed) favourite gauge of inflation, PCE, came in line with expectations in July for both the core and headline figures – and even though the core PCE posted the smallest back-to-back rise since late 2020, the supercore services inflation – very closely watched by Mr. Powell and team, and that excludes not only energy but also housing, rose by the most on a monthly basis since the year began. Plus, personal spending remained strong – in line with the GDP data released earlier this week.   Digging deeper, the personal income fell slightly, meaning that Americans continue to tap into the reserves to continue spending. But the good news for the Fed is that the consumer spending at this speed could continue as long as the savings are available. And according to the latest data, personal savings in the US fell from 4.3% in June to 3.5% in May. Before the pandemic, the savings level was close to 9%. In conclusion, savings are melting, housing affordability is falling, mortgage rates are up, low-income Americans reportedly fall behind their important payments like rent, and the main street gives away signs of suffering. But the GDP remains above 2%, above the long-term trend which is thought by the Fed to be around 1.8%, and the scenario of soft landing is what the market is pricing convincedly.  Jobs day!  The US jobs data shows signs of loosening but the numbers are still at historically strong levels. Due to be released later today, the US unemployment rate is expected to remain at a multi-decade low of 3.5%, and the US economy is expected to have added around 170K new nonfarm jobs in August. In the last twelve months, the US economy added almost 280K jobs on average. If today's data comes in line with expectations, the last 12-month average will still remain close to 270K monthly job additions on average. Historically, we expect NFP to fall to around 50K per month a few months into recession. So, to tell you that: we are not there just yet.   Today, a softer than expected NFP figure, a slight deterioration in the unemployment rate, or softer-than-expected wages data could further cement the idea that the Fed will skip a pause at the September meeting, and maybe at the November as well. So far, the US Treasuries have had their best week since mid-July. The US 2-year yield retreated to 4.85%, while the 10-year yield flirted with the 4% mark for the first time in three weeks. But who says a rapid jump, also says a rising possibility of a correction. One thing is sure, we don't expect any major central banker to call victory on inflation just yet...  European inflation sticks around 5.3% due to rising energy  Latest CPI estimate showed that Eurozone inflation stagnated at 5.3% in August due to the sticky energy costs, versus a fall to 5.1% expected by analysts. Inflation in France for example accelerated at a much faster pace than expected in August, while the latest PMI numbers showed weakness in activity. German retail sales also fell faster than expected in July, whereas inflation in Germany also ticked higher last month. The combination of weak economic data and sticky inflation is a nightmare scenario for the European Central Bank (ECB). The ECB should raise the rates to continue fighting inflation, even though the underlying economies are under pressure. Today, the final PMI figures will likely confirm the ongoing slowdown. The EURUSD gave back most of its weekly advance after yesterday's inflation data, hinting that the market is worried that further ECB hikes will further damage economic activity. The bears are tempted to retest the 200-DMA support. If they are successful, the next natural bearish target stands at a distant 1.0615, the major 38.2% Fibonacci retracement on past year's rally, which should distinguish between the continuation of the actual positive trend and a bearish medium term reversal.   More stimulus from China  This week's PMI data showed that the Chinese manufacturing contracted at a slower pace, and today's Caixin PMI showed that it stepped into the expansion zone in August, whereas the Chinese services PMI fell short of expectations and the wave of further bad news, like Country Garden announcing an almost $7bn loss in H1, talk of the company's yuan denominated bond default, Moody's downgrading of the firm to Ca and Evergrande's wealth unit saying that it couldn't make payments on its investment products due to a cash crunch, combined to the existing and worsening property crisis get the People's Bank of China (PBoC) to announce lower payment requirements for first and second-time house buyers, and to encourage lower rates on existing mortgages. But it won't improve the situation overnight. The CSI 300 is closing a week PACKED with fresh stimuli on a meagre note.   Crude rallies  The barrel of American crude jumped more than 2% yesterday and is consolidating above the $84pb level. The next bullish targets stand at $85pb, the August peak, and $89pb, in the continuation of an ABCD pattern. But the rally can't extend above $90 without reviving global inflation expectations and recession worries, which would then start playing against the bulls. 

Korean activity data point to a cloudy third-quarter According to recent industrial production, exports, and survey data, domestic demand will slow further, while a mediocre recovery is expected for exports. Government support to boost domestic demand will buffer the sharp contraction in consumption.   Exports continued to fall in August Exports declined by -8.4% year-on-year in August (vs -16.4% in July and a market consensus of -11.8%), extending its decline trend for 11 months. However, imports fell -22.8%, even faster than exports, thus the trade balance recorded a surplus of US$869m in August. Six out of 15 major export items increased with robust transportation equipment exports (vehicles 28.7%, vessels 35.2%). However, semiconductors (-21%), oils (-35%), petrochemicals (-12%), and steels (-11%) declined as price effects worked unfavourably. By export destination, exports to the US (2.4%), EU (2.7%), and the Middle East (6.7%) rose firmly on the back of strong vehicle and machinery exports while exports to China (-19.9%) continued to fall, but at a slower pace than in the previous quarter. Looking ahead, the decline in exports will likely narrow, with a return to growth only possible by the end of the year.    The trade surplus has continued for three months in a row   Semiconductors are key Export data suggest that chip exports have gradually improved compared to January as the contraction of exports continuously narrows. We believe that this is mainly due to base effects rather than the industrial cycle turning favourable. We believe that chip exports in value terms will continue to improve by the end of this year mostly supported by the low base last year, but that in volume terms will remain at the current level at the best.  Manufacturing industrial production data showed that semiconductor production dropped by -2.4% month-on-month seasonally adjusted in July, the first decline in five months. Major chip makers announced their production cut plans early this year, and we finally saw some of those promised reduction cuts in July. We think the production cuts will continue for a couple of quarters as inventory levels stay at an elevated level. Thus, the rebound of the chip cycle will probably come even later than the end of this year. Still, we are optimistic that AI chips will likely outperform in the near term, but the overall semiconductor demand condition will not improve meaningfully at least for a couple of quarters.   Semiconductor cycle hasn't bottomed out yet   Domestic demand is expected to worsen further Consumption and investment also slid in July with retail sales and facilities investment down -3.2% MoM seasonally adjusted and -8.9%, respectively. Worrying about the sharp decline in consumption and service activity, the government decided to extend the Chuseok holiday and provide a travel voucher programme to boost domestic demand.   This will temporarily support household consumption in the near term. However, we are still concerned about the ongoing slowdown in construction and facility investment, which will drag on growth over the next few quarters.   Lacklustre survey data also add concerns to the near-term outlook Manufacturing PMI and local business survey slid in August. The Bank of Korea's Business Survey Index outlook for manufacturing declined by four points to 67, the lowest level in five months while the manufacturing PMI retreated to 48.9 (vs 49.4 in July), staying in the contraction zone for 14 months. With semiconductor cycles showing no clear signs of bottoming out and growing concerns over softening global demand, the manufacturing slump is expected to continue this quarter.   Cloudy outlook from survey data   Third quarter GDP outlook In terms of GDP, we believe that third-quarter GDP will decelerate to 0.2% quarter-on-quarter seasonally adjusted from 0.6% in the second quarter. The positive contribution of net exports will continue mainly as imports will decline faster than exports. However, despite government support measures for consumption, domestic demand conditions will likely worsen further. We foresee a continuation of the contraction in investment with tight financial conditions for businesses, weak construction performance and sluggish consumption. Meanwhile, the Bank of Korea's policy priority will shift from inflation to growth with external and internal growth conditions deteriorating further.   GDP outlook: ING vs BoK The Bank of Korea produces a bi-annual outlook for GDP. ING has converted it to quarterly-based growth.

Strong run continues Chinese data doesn’t hinder the rally Momentum may be key as price approaches August highs   Oil prices are nudging higher again today, technically on course for a fifth day of gains in six in Brent – six in a row in WTI – although broadly speaking they’re just a little above the middle of what appears to be a newly established range. Brent peaked near $88 a few weeks ago and bottomed around $82 last week as we await more direction on the economy and therefore demand. Data this week has been on the weaker side, although it’s the jobs report tomorrow we’re most interested in. The Chinese PMIs overnight had something for everyone. Manufacturing was unexpectedly improved but still contracting at 49.7 while services were quite the opposite, expanding but at a slower pace than anticipated. All in all, it continues to paint the picture of a sluggish economy that’s showing few signs of bouncing back stronger.   Head and shoulders not meant to be The head and shoulders that formed over the last month appears to have failed before it even completed, with the recent rally taking the price above the peak of the right shoulder.     BCOUSD Daily   While these formations are never perfect, as per the textbook, and it could be argued that a decline from here could still potentially qualify as a second right shoulder, that may be clutching at this point. It’s peaked a dollar above, even if it only looks relatively minor on the chart which suggests to me the previous formation – which is only complete with a break of the neckline – is now null and void. Perhaps I can be persuaded otherwise if the price heads south from here. The question now is how bullish a signal this actually is? Are we going to see a run at this month’s highs? A break above $90? I’m not convinced at this stage. Recent momentum looks quite healthy but which could be a promising sign. But that will only be put to the test as we near the previous highs around $88. If the MACD and stochastic keep making higher highs as the price approaches $88 then that would certainly look more promising.  

The euro is flat on Friday, after sustaining sharp losses a day earlier. In the European session, EUR/USD is trading at 1.0844. Eurozone, German manufacturing struggling There wasn’t much to cheer about after today’s Manufacturing PMI reports for Germany and the eurozone. Although both PMIs improved slightly in August, business activity continues to decline in the manufacturing sector. The Eurozone PMI came in at 43.5 in August, up from 42.7 in July and just shy of the consensus estimate of 43.7. In Germany, manufacturing is in even worse shape – the August reading improved from 38.8 to 39.1, matching the consensus. Manufacturing is in deep trouble in the eurozone and in Germany, the largest economy in the bloc. The PMIs point to a constant string of declines since June 2022. The volume of new orders is down and exports, already struggling in a weak global environment, have been hit by the slowdown in China which has reduced demand. Germany’s weak manufacturing data is particularly disturbing. Once a global powerhouse, Germany has seen economic growth slide and is officially in a recession, with two consecutive quarters of negative growth in the fourth quarter of 2022 and the first quarter in 2023. US nonfarm payrolls expected to ease In the US, the nonfarm payroll report is expected to decline slightly to 170,000, compared to 187,000 in the previous reading. If nonfarm payrolls are within expectations, it will mark the third straight month of gains below 200,000, a clear signal that the US labour market is cooling down. A soft nonfarm payrolls report would cement an expected pause by the Federal Reserve next week and also bolster the case for the Fed to hold rates for the next few months and possibly into 2024. . EUR/USD Technical EUR/USD is tested support at 1.0831 earlier. Below, there is support at 1.0731 1.0896 and 1.0996 are the next resistance lines Content  

Moody's latest decision on Hungary gives false sense of security Moody’s decision to affirm Hungary’s Baa2 rating with a stable outlook came as a positive surprise. However, we are not entirely comfortable with their argument, particularly the balanced risk assessment, which could lead decision-makers to become complacent.   On 1 September, Moody's affirmed Hungary's rating at Baa2 with a stable outlook. The stable outlook indicates that the risks are balanced, but we disagree, as we believe the risks are tilted to the downside, hence our earlier expectation of a downgrade to the outlook. In our view, the recent decision provides a false sense of security and may lead policymakers to become complacent at a time when growth prospects are deteriorating, and fiscal problems are mounting. These risks have led us to be more downbeat overall. The rating agency highlighted in its statement that it expects Hungarian GDP to stagnate this year. Given the economic performance in the first half of 2023, this would require GDP to grow by at least 1.9% quarter-on-quarter in both the third and fourth quarters, which we consider highly unlikely. The last time we saw such a solid performance was in late 2021 and early 2022. But back then, growth was fuelled by positive real wage growth, supportive monetary policy, very accommodative fiscal policy and, of course, some Covid rebound dynamics. Before the Covid-rebound period, such a sequence of strong growth had never happened. Although we expect the economy to perform better in the second half of the year, we are concerned that the hole dug in the first half of the year is too deep to climb out of quickly. In this regard, we have downgraded our full-year GDP forecast from 0.2% to -0.5% year-on-year, as we now see a recession in 2023.   CDS and sovereign credit rating (Moody's)   As for the nominal growth outlook, the GDP deflator is around 8% based on the first-half data, while the government had planned for 15% for the year combined with a 1.5% real GDP growth. Although the GDP deflator will definitely rise in the second half of the year (based on seasonal patterns), we believe that the risk of not reaching 15% is non-negligible. On top of that, as we mentioned earlier, real wage growth will be negative this year, in our view.   And nominal growth matters a lot when it comes to fiscal measures where the nominal GDP is the denominator, like in the deficit-to-GDP and in the debt-to-GDP ratios. The latter reached 75% at the end of the second quarter, which is 5.3 percentage points higher than the government's 2023 target in the latest Convergence Programme. With further weakness in the nominal GDP, the goal to reduce the debt-to-GDP ratio is getting harder, especially with the recent slippage in the deficit. In addition, the Hungarian government has not given up on the acquisition of Budapest Airport, which would be financed by FX bond issuance in our view, and hence would add to the debt burden of the country. Speaking of the budget shortfall, Moody's expects a 0.3ppt increase in this year's deficit target to 4.2% and a 0.6ppt increase in the 2024 target to 3.5% but does not hold the government accountable or flag this as negative. In the wake of the reinstallation of the Excessive Deficit Procedure, admitting that the government will miss the 2024 sub-3% deficit target and being negligent looks interesting. Moreover, like us, they include the scenario of an agreement with the EU but do not highlight this as a very significant risk factor. Moreover, we respectfully disagree with the positive elements listed by Moody's. It cited Hungary's "strong embeddedness in manufacturing" as a positive factor, which seems very odd to us at a time when the global economy is in a manufacturing recession. It also noted that the improvement in the trade and current account balances was due to a much lower dependence on Russian energy sources, which we see as a false interpretation of data. First, Russian energy dependence has not fallen significantly based on import statistics. Second, the improvement in external balances has occurred because domestic demand has collapsed, reducing the need for imports (including energy and non-energy goods), while energy prices are very much lower than last year. And finally, Russian contractor Rosatom started works on the first phase of construction of the new Paks Nuclear Power Plant (Paks II) units in Hungary, which hardly can be seen as a reduction of energy dependency. Taking all these factors into account, we believe that Moody's has underestimated the negative risk impact of economic activity, fiscal policy and geopolitical issues, thereby providing a false sense of security at a time of heightened uncertainty about the country’s short-term general outlook.

06:15BST Tuesday 5th September 2023 Services PMIs set to confirm contraction, RBA leaves rates unchanged  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets struggled for gains yesterday in the absence of US markets, as the initial boost of a China stimulus inspired rally in Asia faded out, even though basic resources outperformed. This late weakness in the European day looks set to continue this morning.      The day began brightly when Asia markets rallied on signs that China's recent stimulus measures were helping to boost the property sector, after a jump in China home sales in two major Chinese cities helped to propel the Hang Seng to 3-week highs. This followed on from the Friday boost of a US jobs report, which added to the argument that the Federal Reserve would be able to keep rates on hold when they meet later this month.     The return of US markets after yesterday's Labour Day holiday should offer a bit more depth to today's price action in Europe with the focus today set to be on the services PMIs for August, after the RBA left Australian interest rates unchanged at 4.10% earlier this morning, and the latest Chinese Caixin services PMI slipped back to its weakest this year at 51.8. No surprises from the RBA keeping rates on hold for the 3rd time in a row, with little indication that rates will be cut in the future, with the central bank insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.     For most of this year it has been notable that services PMIs on both sides of the Atlantic have managed to offset the weakness in manufacturing in the form of keeping their respective economies afloat. The strength of services has been a major factor behind the hawkishness of central banks in their efforts to contain inflation with prices and other related costs proving to be much stickier than other areas of the economy, due to high levels of employment and tight labour markets.       In the last couple of months there has been rising evidence that this trend has started to shift with the August flash PMIs from Germany and France seeing a sharp drop off in economic activity. This weakness translated into a sharp slide in services sector activity in both France and Germany during August to 46.7 and 47.3, with Italy and Spain also set to show a similar slowdown, although given the size of their tourism sectors they should be able to avoid a contraction, with Italy expected to slow to 50.4 and Spain to 51.5.     Today's numbers could well be the final piece of the puzzle when it comes to whether the ECB decides to pause its rate hiking cycle, even as August inflation saw an unwelcome tick higher. Further complicating the picture for the ECB is the fact that PPI has been in negative territory for the last 3 months on a year-on-year basis and looks set to slide even further into deflation territory in July. On a month-on-month basis we can expect to see a decline of -0.6% which would be the 7th monthly decline in a row. On a year-on-year basis prices are expected to fall by -7.6%.   On the PMI front the UK services sector is expected to confirm a fall to 48.7 from 51.5 in June, in a sign that higher prices are finally starting to constrain consumer spending.     EUR/USD – holding above the August lows at the 1.0760/70 area for now, as well as the trend line from the March lows. A break of the 1.0750 area potentially opens up a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – currently holding above the support at the August lows at 1.2545, after last week's failure to push above the 1.2750 area. We need to push back through the 1.2800 area to diminish downside risk or risk a move towards 1.2400, on a break below 1.2530.         EUR/GBP – the bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area, where we failed last week. We also have resistance at the 50-day SMA, and while below that the bias remains to sell into rallies.     USD/JPY – having found support at the 144.50 area on Friday, the bias remains for a return to the 147.50 area. A break above 147.50 targets a move towards 150.00. Below support at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 22 points lower at 7,430     DAX is expected to open 34 points lower at 15,790     CAC40 is expected to open 12 points lower at 7,267  

EUR/USD declines to two-month low Eurozone, Germany Services PMIs indicate contraction Eurozone inflation expectations steady at 3.4% The euro is back to its losing ways on Tuesday, after holding steady a day earlier. In the North American session, EUR/USD is trading at 1.0745, down 0.48%. The euro has faltered badly, losing about 2% since Wednesday and trading at its lowest level since July. Eurozone inflation expectations edge higher ECB Christine Lagarde has been talking about the importance of beating inflation but has shrugged when asked about interest rate policy. Lagarde spoke in Jackson Hole in late August and again on Monday in London, hammering home the messsage that inflation remains too high and the ECB will maintain high rates for as long as necessary in order to bring inflation back to the 2% target. Lagarde’s hawkish message in these speeches gave no hints as to whether the ECB would raise rates at its meeting on September 14th. Perhaps she is keeping the markets guessing, but another reason could be that the ECB hasn’t yet decided whether to hike or hold, with doves and hawks at the ECB strongly divided on the next move. Inflation remains high at 5.3% but another hike increases the risk of tipping the weak eurozone economy into a recession. Lagarde stressed on Monday that it was critical for the ECB to keep inflation expectations firmly anchored. I can only imagine her frustration today on reading the ECB monthly survey which indicated that inflation expectations for the next 12 months remained at 3.4% in July, and rose from 2.3% to 2.4% for three years ahead. Eurozone inflation has been moving in the right direction, but it appears that bringing it back down to target could take years.   Eurozone, German services PMI indicate contraction The services sector has helped carry the eurozone economy at a time when manufacturing continues to decline. However, the expansion in services came to a crashing halt in August as indicated in today’s PMIs for the eurozone and Germany. The 50.0 line separates contraction from expansion. The eurozone Services PMI for August was revised to 47.9 from a preliminary 48.3 points. This marked the first contraction in services activity this year and was the weakest reading since February 2021. The news wasn’t much better from Germany, the bloc’s largest economy. The Services PMI was confirmed at 47.3, the first contraction in eight months and the lowest level since November 2022. The euro has fallen about 0.50% in response to the weak services data, another painful reminder of the fragility of the eurozone economy.   EUR/USD Technical EUR/USD is testing support at 1.0716. Below, there is support at 1.0658 There is resistance at 1.0831 and 1.0889    

German industrial production goes from bad to worse Industrial production dropped for the third consecutive month in July, providing more evidence of elevated recession risk for the German economy.   Germany’s industrial production continues its nosedive and even diehard pessimists are nervous. German industry dropped by 0.8% Month-on-Month in July, from -1.4% MoM in June; the third consecutive monthly drop. For the year, industrial production was down by 2.1%. Industrial production is now more than 7% below its pre-pandemic level, more than three years since the start of Covid-19. Production in energy-intensive sectors also decreased, by 0.6% MoM in July, and is still down by more than 11% over the year. The only positive news in today’s report is the increase in construction activity by 2.6% MoM, from – 3.1% MoM in June.   Risk of falling back into contraction remains high Today’s industrial production data will do little to change the current hangover mood in Germany. A stagnating economy in the second quarter after two quarters of contraction gave hope to some that the economy is on the way to improvement. However, the full batch of hard macro data for July suggests that the risk of recession is high again. Retail sales, exports and now also industrial production all dropped in July, giving the German economy a very weak start to the third quarter. Yesterday’s very disappointing drop in industrial orders - by almost 12% month-on-month in July - illustrates the current problem of German industry, that of shrinking order books and high inventories; a combination that simply doesn’t bode well for industrial production in the months ahead. The country finally seems to have woken up to the reality that it has lost international competitiveness over the last decade on the back of not enough investment and hardly any structural reform. The pandemic and the war in Ukraine have both worsened the problems without being the root cause. It doesn’t come as a surprise that, according to a recent survey, German companies have never been more pessimistic about the country’s international competitiveness. With earlier investment and reforms, the economy could have mastered the current challenges better. Economic stagnation is the new normal. Yesterday, German Chancellor Olaf Scholz called for a “Germany pact” - appealing to the country's democratic parties to unite in a concerted effort to modernise Germany, speed up bureaucracy and combat the current economic crisis. This call comes only a week after the government had announced a small programme to incentivise corporate investments in the energy transition, the construction sector and digitalisation. No details of how such a “Germany pact” could look were revealed. The positive news is that the sense of urgency has finally increased. Let’s now wait for more concrete policy action. Until then, stagnation in industry and the broader economy looks like the new normal.

Hungarian industry shows summer upturn Industrial production has often been heavily volatile during the summer months in Hungary. This year was no different as we saw a surprise uptick in industrial production in July. However, we need more evidence to see this as a true turning point.   Hungarian industry delivered a significant positive surprise in July, with output volume rising by 2.8% month-on-month (MoM) adjusted for seasonal and calendar effects. As a result, the yearly change in output showed a significant improvement from June, coming in at -2.5% (adjusted for calendar effects). Given that survey-based soft indicators (Manufacturing PMI, different confidence indices of industry) have been predicting a further contraction in industrial production in recent months, we look forward to a detailed assessment by the Statistical Office of the reasons for the positive surprise. For the time being, it is safe to say that these soft indicators continue to fail to capture shorter-term fluctuations in the sector's performance.   Manufacturing PMI and industrial production trends   While we await the detailed data, the preliminary release suggests that there is nothing new to see here. There was no significant change in the structure of industrial production. While most sub-sectors contributed to the decline in output, the exceptions remain the manufacture of electrical equipment (EV batteries) and car manufacturing. The only question that remains is whether the export-oriented sectors have been able to recover much better from the possible first summer shutdowns, or whether the other sectors have already experienced some sort of early recovery. Knowing that the performance of industry during the summer seasons has been extremely volatile recently with a lot of variation in the summer shutdown periods, it is really hard to say whether the July upturn is real or just a false hope generated by unreliable seasonal adjustmen   Performance of Hungarian industry   For the time being, we need more evidence to believe that the July surprise is a positive turning point. All the more so because we haven't yet seen any significant positive changes in other segments of the Hungarian economy that would support the theory of improving domestic demand and industrial production in sectors linked to the domestic market. Looking ahead, we expect this dichotomy between external and domestic demand to persist in the short term, making industrial performance a tale of two halves. Export-oriented sectors can boost industrial production in the short term through capacity-enhancing investment. The latest Eurostat survey shows that manufacturers expect capacity utilisation to improve somewhat in the third quarter, from 75.7% to 76%. However, this is still far from the peak of around 86%. This suggests that the positive impact of exports may be starting to fade as new export orders become more subdued globally and the one-off boost from capacity expansion fades.     Production level and quarterly performance of industry   On a more positive note, towards the end of the year industrial companies may be able to renegotiate their energy contracts at a much more favourable market price. This could significantly reduce their costs and lead to a resumption of production in sectors that are now underperforming due to cost-side pressures. In addition, as inflation moderates and domestic purchasing power recovers towards the end of the year, domestic industrial production could receive some positive impetus not only from the supply side but also from the demand side, offsetting the initial weakening of industrial exports. For 2023 as a whole, however, we still expect the performance of industry to be negative, i.e. below last year's total output. This also means that, barring a significant surprise from industry in the remainder of the year, agriculture will be the only sector able to meaningfully mitigate the expected decline in GDP this year.    

Asia Morning Bites US inflation report out tonight could see Asian markets mark time today.   Global Macro and Markets Global markets:  US stocks are up one day, down the next at the moment. Yesterday, it was time for some losses led by tech stocks following an Apple event to launch the iPhone 15. The S&P 500 dropped 0.57% while the NASDAQ lost 1.04%. This was actually in line with the steer from equity futures yesterday. But today, they are giving little away. Chinese stocks fell also. The Hang Seng was down 0.39% and the CSI 300 was down 0.18%. 2Y US Treasury yields nosed up 2.9bp to 5.02%, while the 10Y Treasury yield was marginally lower by 0.8bp taking it to 4.28%. EURUSD is slightly higher at 1.0758, but spent a lot of time yesterday exploring the downside before recovering. This hasn’t helped the AUD, which has been steady to slightly weaker over the last 24 hours, sitting at 0.6427 currently. Cable also slid yesterday and made a less robust recovery than the euro, leaving it at 1.2492 currently. And the JPY is also softer, rising to 147.126.  The PBoC’s recent browbeating of the market still seems to be keeping a lid on the CNY, which remains at 7.2923. We’d expect it to test the 7.30 level again in the coming days, though tomorrow’s data dump will need to be taken into account – we think it might be slightly less negative than in recent months…The KRW had a positive day, rising 0.28% to 1327.64, and the THB weakened 0.38% to 35.640, but there were few other notable movements in the rest of the Asia FX pack.   G-7 macro:  Today, we get August inflation data from the US. And the news will be mixed. Headline inflation will likely rise from 3.2% to 3.6%YoY - all the helpful base effects that helped lower inflation in the first half of the year are used up now, and the month-on-month rate at 0.6% (expected), is still far too high to result in anything other than an inflation increase. But it is exactly the opposite story for core inflation, which has been much stickier, but could now benefit from more helpful base effects, and the fact that most of the price increases are in the non-core food and energy sectors. We should see core inflation falling to 4.4% (consensus 4.3%) from 4.7% YoY. Exactly how the market takes this mix of data is difficult to judge in advance, and could come down to small deviations from the consensus numbers on both figures. Other than this, the UK releases a raft of production, trade, construction and monthly GDP data for July.   India: Trade balance data for August will likely show the deficit in the -USD20bn to -USD21bn range. Export growth has been on a slow but steady decline for a long time, and was -15.86%YoY in July. Looked at in USD levels terms, exports are still trending slightly lower, but the rate of annual decline should moderate to low single digits this month. Inflation data released yesterday evening came in at 6.83%, only slightly higher than our 6.7% forecast, and slightly lower than the consensus 7.1% estimate.   South Korea: The jobless rate unexpectedly declined to 2.4% in August (vs 2.8% July, 2.9% market consensus). The construction sector added jobs for the first time in six months but manufacturing shed jobs for a second month. With summer holidays underway, hotels and restaurant jobs gained. Rising pipeline inflation raised concerns that consumer prices could rise more than expected in the coming months. Import prices surged 4.4% MoM nsa (0.2% in July), the largest increase in 17 months, but due to base effects the YoY growth still fell -9.0%YoY (vs -13.6% in July). Weak currency and strong commodity prices are the two main reasons for the price increases. The KRW is hovering above the 1,300 level and oil prices continue to rise. We are concerned that consumer price inflation may rise more than expected. The tighter job market and rising prices will support the BoK’s hawkish stance. But we still don’t think this will push them to deliver additional hikes by the end of this year given sluggish exports and weak investment.   What to look out for: US CPI inflation and China data South Korea unemployment (13 September) Japan PPI inflation (13 September) India trade balance (13 September) US CPI inflation (13 September) Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)

Total revenue in 2Q23 was PLN 36 million (-18% y-o-y, vs. PLN 34.4 million our expectations; PLN 32.2 million consensus), but there was a smaller share of materials and a larger share of sales revenue (PLN 34.3 million vs. PLN 17.5 million in 2Q22), EBIT was PLN 17.5 million (vs. PLN 11.2 million our expectations; PLN 10.3 million consensus), EBITDA of PLN 19.2 million (vs. PLN 13 million our expectations; PLN 12.1 million consensus), net profit of PLN 15.2 million (vs. PLN 9.9 million our expectations; PLN 8.9 million consensus), In 2Q23, in contrast to 1Q23, the company reported negative cash flow from operations - in 2Q2023 it amounted to PLN -25 million (vs. +17.6 in 1Q23), in the entire H1, cash flow from operations was negative at PLN -7.4 million, CAPEX in 1H23 amounted to PLN 6.7 million, Cash at the end of H1 2023 was PLN 38.5 million (vs. PLN 53.6 million at the end of 2022), Management maintained the guidance of expected revenues, while raising the expected EBITDA margin for the full year 2023 above 30% (vs. the previously expected margin of around 25%) - a level above our expectations, Mabion has successfully completed GMP validation and manufacturing of another (second) product under contract with Novavax - antigen against Omicron variant, and has completed technical batch production in the process of technology transfer for Kraken variant (Omicron sub-variant), In line with the 2023-2027 strategy, Mabion is carrying out the modernization process of its existing plant in Konstantynów Lódzki, scheduled for June-November 2023, including the installation of a set of bioreactors with conventional mixing technology and the replacement of 2 bioreactors with orbital shaking technology with 2 new ones with the same technology. We view the results positively, while noting that the guaranteed revenue from Novavax is until Q2 2024, after which the company must acquire new customers to sustain the level of generated results.     Revenues Total revenues in 2Q23 amounted to PLN 36 million (-18% y-o-y, vs. PLN 34.4 million our expectation; PLN 32.2 million consensus), of which the majority was sales revenues (PLN 34.3 million vs. PLN 17.5 million in 2Q22), and materials sales revenues amounted to PLN 0.6 million. Lease revenues amounted to PLN 1.1 million, a level similar to the previous quarter. For the entire H1 2023, revenues amounted to PLN 75.6 million (-8% y/y).   EBIT and operating expenses EBIT in 2Q23 was PLN 17.5 million (vs. PLN 11.2 million our expectations; PLN 10.3 million consensus), EBITDA was PLN 19.2 million (vs. PLN 13 million our expectations; PLN 12.1 million consensus), net profit was PLN 15.2 million (vs. PLN 9.9 million our expectations; PLN 8.9 million consensus). Cost of sales was PLN 8 million (vs. PLN 8.9 million in 2Q23), research and development costs PLN 1.7 million (vs. PLN 2.1 million in 1Q23) and general and administrative expenses PLN 8.5 million (vs. PLN 10.4 million in 1Q23). The company reported that the costs include PLN 1.2 million related to Mabion's development as a CDMO. Relatively high revenues and costs under control allowed the company to generate EBITDA of PLN 19.2 million, a level only slightly weaker than in 1Q23 (PLN 19.8 million) and above our and market expectations.   Summary after the earnings teleconference The following is our selection of information presented by management during the quarterly teleconference: The company is working on business development, at the moment the team already consists of 6 people and the final stage is the acquisition of an experienced person in the US, Talks with new customers are taking longer than the company would like; CDMO is a stable market, but requires patience in acquiring customers and building relationships; the company maintains the goal of acquiring its first new customer in 4Q23, but whether this will materialize is something management cannot answer at this point, Most of the potential new customers are companies developing biologic drugs at an early stage of development - in preclinical or early clinical stages, The sales process for MabionCD20 is still in the first phase, i.e. presenting the product to potential customers, which are large or very large companies, decisions are being made slowly, The company assumes continued cooperation with Novavax in H2 2024, i.e. after the guaranteed period, negotiations are underway with Novavax on this matter; management has stated the proportion of revenue it will aim for in 2024 - 2/3 from Novavax and 1/3 from new customers - this is in line with our forecasts - we assume about 29% of revenue from new customers next year, The plant's modernization is progressing faster than on schedule, so management hopes to see its completion in early December.

US industry posts solid gains, inflation expectations plunge Another respectable industrial production report while the University of Michigan reported a big plunge in inflation expectations. All this should be music to the ears of the Federal Reserve as it seeks a soft landing for the economy and a return to 2% inflation.   Decent industrial output, but strike action could weigh in coming months As with the retail sales report, the US industrial production number beat expectations in August, but the downward revisions to July means that on balance the level of activity is broadly in line with what was expected. This has been a bit of a trend of late with big prints subsequently getting some chunky downward revisions, be it in manufacturing, consumer spending, jobs or GDP. In terms of today’s numbers, US industrial production rose 0.4% in August versus the 01% expected, but there was a 0.3pp downward revision to July's growth (from 1% to 0.7%). Manufacturing rose 0.1% as expected, but there was a 0.1pp downward revisions to July from 0.5% to 0.4% growth. Auto output fell 5% month-on-month after a 5.1% jump the previous month with manufacturing ex vehicles rising 0.7%, led by a 2% jump in machinery manufacturing. Outside of manufacturing, which makes up 74% of total industrial output, utilities output rose 0.9% while mining increased 1.4%.  On balance the report is OK and is stronger than what is implied by the manufacturing ISM report, which has been in contraction territory for 10 consecutive months. However, auto output is up near record highs. Strip this out and the chart below shows there is a much tighter relationship between the ISM and non-auto related manufacturing. Today’s report won’t swing the Fed debate in either direction meaningfully. The key story for manufacturing next month will be how much the UAW strike action hits output. So far it is starting out modestly with just 12,700 on strike, but could quickly escalate and hit output hard.   ISM manufacturing index versus non-auto manufacturing output (YoY%)   US consumer inflation expectations fall sharply University of Michigan confidence fell more than expected to 67.7 from 69.5 (consensus 69.0). The perception on current conditions fell six points while expectations rose 0.8 points. Remember this index is much more responsive to inflation-related issues while the Conference Board measure of confidence is more reflective of the labour market (hence why the Conference Board suggests everything is great, with unemployment below 4%, yet the University of Michigan measure of sentiment suggests the world is on the cusp of falling apart).   Rising gasoline prices are the likely culprit depressing today's report as households feel the hit to spending power it generates elsewhere. Yet, rather bizarrely, we have some big declines in inflation expectations which should be music to the ears of the Fed. 1Y inflation expectations are down to 3.1% from 3.5% – it is actually below the current level of inflation – while 5-10Y expectations dropped from 3% to 2.7%. Both are really big surprises, but the usual caveat applies that they use fairly small sample sizes and things can swing. Nonethless, on balance this is further evidence that backs the Federal Reserve's claims that it can achieve a soft landing for the economy while returning inflation sustainably to target.

Eurozone PMI once again signals contraction in activity in September The PMI ticked up slightly from 46.7 to 47.1 in September. This is better than expected but does not ease concerns about a possible contraction in GDP in the second half of the year.   To be fair, the PMIs are getting harder to read at this point. The slight tick-up from last month does end a streak of four consecutive declines in the composite PMI, but it remains firmly in contraction territory. While better than analysts had expected, the overall picture remains rather bleak on economic growth and adds to contraction concerns. Still, at least today’s PMI indicates that the deterioration of conditions has stopped for the moment. Perhaps that’s the glass-half-full take because the underlying picture that the PMI paints is far from positive. The decline in demand is worsening as new orders fell at the fastest pace since late 2020. Manufacturing has performed poorly for quite some time, but the fact that services are the main contributor to the drop in new orders shows that the weakening of demand in the eurozone is becoming more broad-based. Businesses are still working off old orders at the moment, which is keeping output reasonable right now. Still, that suggests a weaker outlook for the months ahead. With hiring slowing to a snail’s pace, concerns about activity in the months ahead remain. Our base case is for a continuation of very slow growth, more or less stagnation, which means that a quarter of negative growth is certainly imaginable. The inflation picture is also getting more complicated. The surge in oil prices and high wage growth have caused input prices to increase again, which is mainly the case for the service sector. In manufacturing, input prices have turned deflationary. Still, the increase in service sector costs has not resulted in accelerated selling price inflation. Weaker demand is resulting in slowing selling prices in services and in outright drops in prices for manufacturing. Music to the ears of the European Central Bank, no doubt.

Little change in Poland’s employment numbers but wages remain high Average employment in the enterprise sector declined by around 6,000 in September, likely reflecting weaker demand in manufacturing. Wage growth remained in double-digits though, allowing for a further rise in real terms. The trend should continue into 2024, which is good for consumption but bad for persistent core inflation.   Average employment in Poland's enterprise sector in September was unchanged on an annual basis (in line with the consensus) from the previous month. There was, however, a decline in employment in Month-on-Month terms by around 6,000. Despite the weak economy, we see no signs of mass layoffs, and companies are 'hoarding' employment, at least for now; they are concerned about workers' availability in the future. This is most likely related to the limited personnel supply due to the decline in the working-age population and the departure of some immigrants. For months, the situation has been weakest in manufacturing. Furniture manufacturing stands out in particular, which probably felt a strong deceleration in the housing market after  rate hikes from both the Polish central bank and the ECB. However, the rebound in demand for mortgages due to government support gives hope for an improvement at the turn of the year. On the positive side, some service industries stand out, particularly lodging and food service, likely still benefiting from the recovery in pandemic demand and the population rise following the rise in Ukrainian refugees and exports to the country. In September, average wages in the enterprise sector rose 10.3% YoY (very close to our 10.2% forecast, with a consensus of 10.8%), following an 11.9% YoY increase in August. The slowdown in wage growth most likely reflects a higher base and fewer working days than in September 2022 (which lowered piecework wages). The minimum wage will increase twice in 2024 (by a total of about 20%), which, especially in service industries, forces an adjustment of the entire wage structure for those earnings above the minimum. This, combined with the still generally good condition of the labour market, suggests that double-digit wage growth will also continue next year. This allows for a further rebound in consumption but has negative consequences as far as persistent core inflation is concerned.

Why a slowdown in Spanish growth could be here to stay Spain's economy grew by 0.3% in the third quarter, a slowdown from 0.5% growth in the second quarter which we think is likely to continue in the coming months.   Spanish economy grows 0.3% in third quarter As expected, Spanish GDP grew 0.3% quarter-on-quarter in the third quarter, according to figures released this morning by Spain's statistical service INE. This is a cooling off from the first half of the year. In the second quarter, the Spanish economy still grew by 0.5% QoQ. On an annual basis, Spain's third-quarter economic output expanded by 1.8%. Growth was mainly driven by domestic demand – more specifically, consumption –  while business investment contracted and government spending slowed in the third quarter. Looking at the different sectors, these levels were sustained by the growing services sector, while manufacturing and construction contracted last quarter.   Spanish economy more buoyant than rest of eurozone despite slowdown Despite slowing down, Spain is expected to head for growth of 2.5% in 2023, well above the 0.5% growth forecast for the eurozone. Due to some favourable structural differences, Spain's economy has proved much more resilient than other countries. The larger weight of the tourism sector underpinned growth. Spain experienced a strong tourism season and benefited from a further recovery of all tourism-related activities to their pre-Covid levels. In addition, the struggling manufacturing sector has a smaller weight in Spain. Manufacturing represents only 12% of gross value added, significantly less than the 22% in the German economy, for example. Finally, the Spanish economy is much less exposed to the ailing Chinese economy than others.   Increasing headwinds for the economy in coming months We expect the slowdown to continue. The European Central Bank's tightening cycle has taken a lot of oxygen out of the economy, and we'll surely begin to feel the impact in the coming months. The ECB's latest bank lending survey released on Tuesday shows credit standards tightening further and credit demand from businesses and households fell sharply in the third quarter in Spain, which does not bode well for investment activity. In addition, household finances will come under more pressure in the coming months. Spanish growth was boosted this year by a recovery in purchasing power thanks to higher nominal wage growth, strong job growth and cooling inflation. However, jobs growth is slowing, with higher interest rates and increased fuel prices also threatening to put pressure on household finances. This is certainly the case for households that financed the purchase of their home with variable interest rates (around a third of all households), who will have less budget left over to spend. Lastly, the contribution of the tourism sector will also be smaller next year now that the sector is roughly back to its pre-Covid level. In addition, we should not expect a strong rebound for the manufacturing sector. The manufacturing sector is struggling with dwindling order books and energy-intensive companies are still struggling with a competitiveness handicap. Add to this a slowing global economy, with a stagnant eurozone economy, a US economy that seems to be at its peak and a Chinese economy struggling to get up to speed, and a further slowdown in the coming months seems likely. All of these headwinds will curb Spain's growth momentum. While we still assume an average growth rate of 2.5% for 2023, we expect it to slow to 1.2% next year.  

China: Momentum waned in October PMI data for October showed momentum in China's economy waned following recent improvements in hard activity data. The manufacturing PMI dropped back into contraction territory and the non-manufacturing PMI also fell.   Economic momentum slowed in October China's Official PMI numbers fell in October, which comes as a slight shock as recent activity data had been firming, and this suggests that the economy is still struggling despite the better-than-expected 3Q23 GDP figures reported recently.  China's composite PMI dropped from 52.0 to only 50.7 - consistent with only very slow overall economic growth. Within this total, the manufacturing PMI index fell into contraction territory (49.5, down from 50.2). There was a bigger fall in the non-manufacturing index to 50.6 from 51.7, but it managed to remain in expansion territory (just).    China's Official PMI indices (headlines)   Most industries saw growth slow By industry type, most manufacturing sectors experienced a slowdown in growth in October, though for companies that are heavy consumers of energy, activity actually declined slightly, perhaps affected by recent increases in the prices of crude energy.  Focusing on the manufacturing sector, the sub-components of the PMI index were quite mixed. Weak export orders and an inventory buildup, together with weak imports weighed on the headline index. Manufacturing production itself was not so bad, and employment also looked stronger, though quite a lot of the increase can be attributed to higher purchasing prices, which isn't necessarily a good thing.    October 2023 Manufacturing PMI - subcomponents   4Q23 GDP could slow If reflected in hard activity data, today's PMIs suggest that the momentum of China's economic growth ebbed at the beginning of the fourth quarter. Talk of recent support measures, including a wider central government deficit, will help offset any tendency for the economy to slow, though such measures will probably have more of an impact on growth at the beginning of 2024, given that we are already a third of the way through 4Q23.  Even so, today's data suggest that although it has weakened, economic growth is still ongoing. And if this initial set of data is representative of what will follow for the rest of the quarter, it should still be enough for China to hit its 5% GDP target for 2023 though on slower incremental growth in the fourth quarter of 2023. That said, 5% is a low hurdle, and reaching it doesn't mean that all of China's growth worries are over.

Korea: Exports rebound for the first time in thirteen months Exports rebounded in October, driven mainly by solid vehicle and machinery exports, along with signs of improvement in chip exports, suggesting that global demand conditions are holding up well. However, the weak manufacturing PMI hints that the expected export recovery will only be modest.   Exports gain suggests global demand conditions remain healthy October exports rose 5.1% YoY (vs -4.4% in September, 6.1% market consensus) on the back of solid car (19.8%) and machinery exports. We also see some signs of improvement in chip exports as their decline moderated to -3.1% from the recent low of -44.5% in January 2023. We believe that Korean chip makers benefit the most from the recent strong demand for AI investment, and chip exports will likely rebound by the end of the year. Also, the recent rise in oil prices has boosted petroleum exports, which registered an 18% gain.  Despite growing concerns over the slowdown in developed economies, Korean exports suggest that global demand remains robust and is even recovering in some sectors. The robust exports to the US (17.3%) signal that resilient private consumption and investment may be sustained at least in the near term as EV cars, mobile devices, and machinery gained the most. However, exports to the EU declined (-10.7%) on the back of weak steel and machinery exports.  Imports dropped more than expected in October, falling by -9.7% (vs -16.5% in September, -2.1% market consensus). The recent rise in global commodity prices hasn't had much impact yet but will come through more meaningfully in the coming months. This will likely narrow the trade surplus despite the recovery in exports.    Exports rebounded but the trade surplus narrowed in October   Manufacturing PMI edged down in October The manufacturing PMI fell to 49.8 in October (vs 49.9 in September), staying below the neutral 50 level for a sixteenth consecutive month. Output and new orders gained compared to the previous month, which is a good sign for exports in the near term. However, a high level of inventories and heightened tensions in the Middle East probably dragged down other subindexes such as inventories, employment, and supplier deliveries. We expect the semiconductor industry to continue to recover with robust demand, but other consumer goods manufacturers may face strong headwinds in the near future.  

As the new year approaches, the UK remains exposed to elevated recession risks, despite a slight uptick in business growth this month, according to recent economic data.  The latest survey of purchasing managers at UK firms reveals a marginal return to growth in November, ending three months of contraction as the Flash UK PMI composite output index, tracking overall economic activity, rose to 50.1 from October's 48.7, the first time in four months it exceeded the 50-point mark indicating stagnation. While the services industry experienced growth and manufacturing contracted at a slower rate, concerns linger as reduced discretionary consumer spending and cost-of-living pressures impact sales and as total new work has decreased for the fifth consecutive month while businesses raised prices in November, passing on wage inflation and higher fuel costs. Despite a pause in interest rate hikes and a slowdown in inflation measures, the survey suggests the UK GDP may remain broadly flat in the final quarter of 2023, prompting concerns for the Bank of England about persistent domestic inflation pressures.  The situation for the bank of England remains precarious and it appears that the recent tax measures announced by the chancellor will do little to help the average consumer that might find themselves struggling with higher bills as the new year approaches. The risk of recession remains high and unless we see a significant rebound in economic activity with a strengthening consumer the possibility for further weakness for the UK economy will continue to increase leaving the central bank with even fewer choices.  

PMI indices point to continued strong inflationary pressures The PMI indices for November, also published this morning, also point to a deterioration in the economic outlook. The composite index fell in November to 44.5, compared with 44.6 in October. For the sixth month in a row, the index is below the 50 threshold. According to the survey, it was manufacturing that was the main drag on activity, with manufacturers recording their sharpest fall in production since May 2020. Order books and business expectations are down in both the services and manufacturing sectors. Worryingly, the survey continues to point to significant inflationary pressures, particularly in the services sector, where inflation has accelerated compared with October.   This is obviously bad news for the European Central Bank as this indicates that disinflation will take time in France. Inflation is likely to remain close to 4% for the next few months, and it will probably be 2025 before consumer price inflation in France returns to 2%. We expect inflation, according to the harmonised index, to be 2.5% at the end of 2024 and 1.9% at the end of 2025.      GDP expected to stagnate in the fourth quarter Ultimately, the activity indicators published so far for the fourth quarter are weak and suggest that French economic growth is likely to continue slowing at the end of 2023. After GDP growth of +0.1% quarter-on-quarter in the third quarter, a rebound in the fourth quarter seems highly unlikely. We expect GDP to stagnate over the quarter, which would bring average growth for 2023 to 0.9%.   We believe that the recovery in 2024 will be slow, weighed down by a sharp global economic slowdown and by monetary policy that remains very restrictive. Given the low starting point for the year, average growth in 2024 is likely to be weak, and well below the government's forecast of 1.4%. Our forecast for average French GDP growth in 2024 is 0.6%.

Eurozone is likely in a shallow technical recession The November PMI does not provide much evidence that eurozone GDP growth will turn positive in the fourth quarter, but the good news is that the downturn is not deepening. We’re currently likely in a very shallow technical recession. The eurozone composite PMI ticked up from 46.5 to 47.1 in November, which still indicates a contraction in business activity. New orders continue to fall as backlogs of work are being depleted. This is more so the case for manufacturing, where the downturn is deeper than for services. Still, new orders fell slightly less in November than in October. This confirms the view that the downturn is not worsening at the moment, but there is little evidence of recovery either. Overall, it looks like this is a shallow technical recession. The employment outlook continues to deteriorate. Services job growth had kept overall employment growing up till now but the survey suggests that employment in this sector is now growing at a snail’s pace. With manufacturing shedding jobs, this is resulting in a marginal downturn. To us, this fits into the bigger picture of a labour market weakening on the back of a few quarters of negative growth. Inflation is on a solid downward trend, but the PMI indicates that input cost pressures remain and that selling price inflation ticked up in November compared to last month. This is mainly coming from services as prices in manufacturing continue to fall. This serves as a warning that inflation pressures are not over yet, even though inflation does continue to move in the right direction with demand having weakened materially.

German, Eurozone PMIs accelerate The euro is trading slightly higher on Thursday. In the European session, EUR/USD is trading at 1.0917, up 0.27%. German PMIs accelerate but still in decline German PMIs were released earlier today, presenting a cup-half-full-half-empty picture. Let’s start with the good news. German Manufacturing PMI hit a six-month high and the Services PMI a two-month high and both beat the forecasts. However, both manufacturing and services remain in contraction, as the eurozone’s largest economy continues to sputter. The Manufacturing PMI rose to 42.3 in November (Oct: 40.8) and beat the consensus estimate of 41.2. Services PMI climbed to 48.7 in November (Oct: 41.2) and edged above the market consensus of 48.5. Manufacturing has been in decline since June 2022 and services has posted four declines. The downturn in the struggling German economy has eased a bit and that bit of positive news has given the euro a slight boost today.  The eurozone PMIs also showed a slight improvement but remain in contraction territory. The soft PMIs suggest that growth in Germany and the eurozone will likely continue to slow, and that could mean disappointing GDP prints for the fourth quarter. Germany’s economy is expected to contract by 0.3% in 2023, while the eurozone is expected to grow by 0.6%. Germany, which not too long ago was a global economic powerhouse, is looking more like the sick man of Europe. US markets are closed for Thanksgiving, which means we’re unlikely to see much movement with the US dollar. That could change on Friday, with the release of US manufacturing and services PMIs. The consensus estimates for November stand at 49.8 for manufacturing (Oct: 50.0) and 50.4 for services (Oct. 49.8). An unexpected reading from either PMI could shake up the US dollar.   EUR/USD Technical EUR/USD is testing resistance at 1.0888. Above, there is resistance at 1.0943 1.0831 and 1.0784 are providing support    

Norges Bank set to keep rates on hold amid lower energy prices Lower oil prices and growing anticipation of rate cuts from the global central banks have taken the pressure off Norway's central bank to hike rates one last time in December. We expect an on-hold decision but expect the bank's new rate projection to push back against expectations of imminent rate cuts in 2024. A hawkish hold should partly shield the krone.   Norges Bank promised a hike, but no longer needs to deliver Back in September, Norway’s central Bank signalled that a December rate hike was likely. By November, policymakers were watering down those promises and said that further progress on the inflation outlook could lead to a pause. We now think “no hike” is the most likely scenario next week, though it’s a close call. Market pricing is leaning this way too. Since the November meeting and the last forecasts produced in September, we’ve seen both a pronounced fall in oil prices and a big dovish repricing in global rate expectations. The former is assumed to weigh on oil investment and ultimately growth and the labour market. The latter removes one source of potential weakening pressure on the krone – or at least that’s true in theory. Norges Bank’s preferred trade-weighted exchange rate index is actually 4% weaker than assumed in the September forecasts. Still, the net effect of all of that should be a lower interest rate projection for coming months. Previously the projection saw rates peaking around 4.50% and staying there until the latter part of 2024. Assuming we don’t get a rate hike from Norges Bank on Thursday, we’d expect a lower peak rate in the projection and there’s a chance we also see a slightly earlier rate cut pencilled in. That said, we doubt policymakers will want to endorse the shift away from “higher for longer“ among investors over recent weeks. Ultimately though we do expect rate cuts next year and we think Norges Bank could end up following the Federal Reserve with easing, starting in the second quarter of next year   Norges Bank interest rate projections over time Still reasons to like NOK in the long-end Markets are pricing in around a 30% implied probability of a rate increase, meaning the risks are skewed to the upside for the Norwegian krone considering how close of a call this is set to be for policymakers. Our baseline is – as discussed – a hold, which should add a bit more pressure on the underperforming NOK, even though Norges Bank may well try to tame dovish speculation by signalling openness to more tightening if necessary. Ultimately, the impact on NOK should not be too material in the event of a hawkish hold, and the krone should quickly revert to being driven by external factors. Indeed, it’s been mostly external factors – namely the dollar recovery, worsening of the European economic outlook, softer oil prices – that have weighed on NOK of late. Domestically, the sustained pace of daily FX purchases in December (NOK 1.4bn) and dovish repricing have had a secondary but non-negligible influence. Expect CPI figures three days before the Norges Bank announcement to move NOK. Looking beyond the short-term underperformance, and despite a less hawkish Norges Bank, there is still a lot to like about NOK; it is deeply undervalued, has a relatively stable economic outlook, and good carry advantage. We continue to favour the krone against its oil peer the Canadian dollar, in 2024.

UK Services PMI accelerates, Manufacturing PMI declines Bailey’s dampens rate cut expectations The British pound is steady on Friday, after posting gains of 1.1% a day earlier. In the European session, GBP/USD is trading at 1.2767, up 0.03%. UK PMIs a mix British PMIs were a mixed bag in December. The Manufacturing PMI eased to 46.4, down from 47.2 and shy of market expectations of 47.5. Manufacturers are pessimistic as the UK economy is struggling and demand for UK exports has weakened. The services sector is in better shape, as the PMI rose to 50.9, up from 53.7 in November, which marked the strongest level of growth since May. Services providers continued to show optimism about business conditions, despite the squeeze from the cost of living and elevated borrowing costs. Bailey pushback sends sterling soaring It’s been a dramatic week, with central bank rate decisions in the spotlight. On Wednesday, Fed Chair Powell shifted his hawkish stance and projected that the Fed would trim rates three times in 2024. This sent the US dollar lower against the majors. The Bank of England took the opposite approach on Thursday in its decision to hold rates at 5.25%. Governor Bailey stuck to his script of “higher for longer”. Bailey acknowledged that inflation was moving in the right direction but said in his rate statement that “there is still some way to go” and kept the door open to further rate hikes to bring inflation back down to 2%. Bailey was crystal clear in comments to reporters after the meeting, reiterating that “it’s really too early to start speculating about cutting interest rates”.   There was no mistaking Bailey’s hawkish message and the pound responded with massive gains. Still, Bailey’s view was far from being unanimous, as the MPC vote was 6-3, with three members in support of raising rates. The markets are marching to their own tune and expect a flurry of rate cuts in 2024, despite Bailey’s pushback. The markets trimmed rate-cut bets following the BoE decision but have still priced in around 100 basis points in easing in 2024. Clearly, there is a deep disconnect between the markets and Bailey & Co. with regard to rate policy.     GBP/USD Technical There is resistance at 1.2835 and 1.2906 1.2727 and 1.2653 are providing support    

Rates Spark: Enough to hold rates down The US 10yr yield remains below 4%. However that's not been validated by the data as of yet. Friday's payrolls report can be pivotal here, but based off consensus expectations the market will remain without validation from the labour market. Also, the Fed's FOMC minutes due on Wednesday are unlikely to be as racy as Chair Powell was at the press conference.   Sub 4% on the US 10yr to hold at least till we see Friday's payrolls outcome The 13 December FOMC meeting outcome remains a dominating impulse for the rates market. The US 10yr yield shot to below 4% on that day, and has broadly remained below 4% since. It was briefly below 3.8% over the holiday period, but now at closer to 4% it is looking for next big levels. The thing is, validation of the move of the 10yr Treasury yield from 5% down to 4% came from the Fed, but not so much from the macro data. We can reverse engineer this and suspect that the Fed has either seen something, or fears that it will see something that will require lower official rates. In consequence, data watching ahead remains key. In that respect, we are days away from a key reading on the labour market as December’s payrolls report is due on Friday. A consensus outcome showing a 170k increase in jobs, unemployment at 3.8% and wage growth at 3.9% would leave us still lacking validation for lower market rates from the labour market data. We have it from survey evidence, and from scare stories on credit card debt and commercial real estate woes. But it's the labour market that is really pivotal. Risk assets struggled a tad yesterday, and that makes a degree of sense given the complicated back story, and the remarkable rally seen into year end. While a one-day move cannot be simply extrapolated, there are reasons to be a tad concerned on the risk front at this early phase of 2024. Geo-political concerns have not abated, and in fact if anything are elevating. Europe is closest to many of these risks, and the economy has been faltering for at least a half year now. Yes the market is expecting rescue rate cuts, but the European Central Bank is yet to endorse those expectations. An elevation of stress without the prospect of near term delivery of rate cuts can be an issue for risk assets. For market rates, this combination maintains downward pressure. The only issue is how far we’ve come so fast. We remain of the view that the US 10yr fair value level is around 4%, but that we will likely overshoot to the downside to 3.5% in the coming months. Our fair value comes of a forward 3% floor for the funds rate plus a 100bp curve. See more on that here.   Today's events and market views It's quiet in Europe for data through Wednesday. The bigger focus for Europe will be on regional inflation readings for December due on Thursday, along with a series of December PMI readings. The likelihood is for some stalling on inflation reduction alongside confirmation of ongoing manufacturing and business weakness. In the US on Wednesday we get ISM readings that will also show a degree of pessimism in US manufacturing. The job openings data will also be gleaned, but the bigger market impulse can come from the FOMC minutes, ones that will refer back to the pivotal 13 December meeting. The odds are they won’t be nearly as dovish as Chair Powell was at the press conference.

Strongest hiring plans in the Netherlands While the economic environment is deteriorating, most employers still have modest hiring intentions as we begin 2024. In fact, most employers in the Netherlands, Belgium and Germany are more optimistic about their hiring plans at the start of this year than they were at the end of 2023. In France, Switzerland and Sweden, hiring plans are weaker for the first quarter of 2024 compared to the end of 2023.    Employers in the Netherlands, Belgium and Germany are more optimistic about their hiring plans in 2024 Percentage of employers planning to hire minus the percentage of employers expecting a reduction in staffing levels     Less demand for temporary workers 2024 will be another challenging year for the temporary employment sector. Economic growth forecasts for most European economies remain weak for 2024, ranging from a mild contraction in Sweden and Germany to a lingering 0.7% GDP growth in Belgium and the Netherlands. As a result, unemployment could rise slightly.  The sluggish economic outlook also has consequences for the employment services industry. Companies are reluctant to invest now that the market remains highly uncertain. This softens the demand for temporary agency workers. That's particularly true for the manufacturing sector, an important industry for temp workers, where new orders continue to decline, as does capacity utilisation. But employment prospects for temp workers are also deteriorating in the services sector. Taken together, market volumes in the employment services sector are expected to decline in most European economies next year.   Staffing sector forecast: volumes are likely to decline in most European economies Volume output (value added) employment services industry, year-on-year, indices (2019=100)     Belgium - Shorter duration of temporary work GDP growth in Belgium is expected to be relatively high at 0.7% in 2024, compared to other European economies. This is mainly due to automatic wage indexation, which means that income increases with the inflation rate (excluding alcohol, tobacco and fuels). Higher purchasing power stimulates consumer spending and, thus, economic growth. Nevertheless, higher hourly labour costs will negatively impact labour demand, including the demand for temporary agency workers. We, therefore, expect a decline in market volumes in the temporary employment sector in 2024. Despite a slow economic growth, Belgium's labour market remains very solid. This is largely due to the country's tight labour market. One of the consequences of talent scarcity is that the duration of temporary work is becoming shorter because temp workers are more often hired on a permanent basis.    France - Hiring plans on hold Economic growth is expected to slow further, from 0.9% in 2023 to 0.6% in 2024. The outlook for both the French services and manufacturing sectors remains bleak. Both sectors are facing lower demand, high inflation and greater uncertainty. In addition, the French labour market is showing the first signs of cooling down, resulting in a rise in unemployment in 2024. The deterioration of the employment climate is mainly due to the services sector. Because almost half of the temps actually work in the service sector, this will also have a negative impact on the demand for temporary agency workers and the number of hours worked. We, therefore, expect a further contraction in employment activities in 2024.    Germany - Hiring freeze over recession fears Weaker global demand, high interest rates, energy uncertainty and persistently high inflation are hitting the German economy this year. This will have consequences for the demand for temporary agency workers. Adverse macroeconomic developments are putting pressure on the German automotive industry, an important sector for employment agencies. In addition, production is also declining substantially in other subsectors of the manufacturing industry. Another factor negatively affecting the temporary employment sector is the shortage of temp workers due to demographic developments. Overall, we expect a further decline in the volume of employment activities in 2024.    The Netherlands - Self-employment is an attractive alternative As a result of a weakening economy, the number of temporary employment hours in the Netherlands is expected to decrease further in 2024. We anticipate a decrease in the number of temporary agency hours by approximately 5% by 2024, mainly due to continued relatively low economic growth. In manufacturing, temp workers are the first to be laid off due to a rapid decline in production and the number of orders.  A major challenge for the staffing industry in the Netherlands is the impact of stricter regulations, which make agency workers more expensive and less flexible. As a result, other forms of employment contracts become more attractive for hiring companies, such as self-employed professionals.    More self-employed people, less flexible employment in the Netherlands in 2023 Share of labour position in the labour force in the Netherlands, third quarter    Sweden - The job market is cooling down Sweden is among the European economies expected to enter a recession in 2023, mainly due to high inflation and higher interest rates. We expect economic activity to stagnate this year. There are already signs that the job market is cooling down. As a result, consumer and business confidence remains low. The economic situation is likely to weaken demand for temp workers, especially in the construction and manufacturing sectors. Overall, we expect market volumes for the temporary employment sector to decline again in 2024.    Switzerland - Another year of negative volume growth in employment activities Like many other European countries, the Swiss economy became more challenging in 2023 due to high inflation, higher interest rates and weakening global demand. GDP growth is expected to slow from 2.2% in 2022 to around 0.6% in 2023 and 2024. The Swiss manufacturing industry, with a relatively large weight of the cyclical chemical and pharmaceutical sectors, is shrinking. The staffing market is also negatively affected by staff shortages, making it difficult to find suitable candidates. In short, we expect another year of negative volume growth in employment activities in Switzerland in 2024.    Manufacturing and construction are the most important sectors for the Swiss staffing industry Percentage of industries that used temporary agency work in Switzerland in 2022   The United Kingdom - Weak outlook for the employment activities sector Economic activity in the UK is expected to grow only modestly in 2024, similar to most other European economies. The sluggish economy will lead to a decrease in the number of vacancies and an increase in the unemployment rate. However, given the ongoing staff shortages, this increase is expected to be limited. Nevertheless, we expect the demand for temporary agency workers to weaken further in 2024. 

Industry continues to decline in the eurozone, and the outlook is bleak The industrial production decline of -0.3% confirms the steady downward trend and adds to expectations of another contraction in eurozone GDP in the fourth quarter of last year. The outlook for industry remains bleak for the months ahead.   Eurozoeon Industrial Production dropped for the third month in a row in November, broadly continuing the trend of contraction in output. Production is now 7.2% lower than it was in September 2022. This means that industry will continue to weigh on economic activity in the eurozone, clearly performing much weaker than services. The eurozone economy experienced negative growth in the third quarter and could well have seen another quarter of negative growth in 4Q too. The industrial figures at least point to that. The outlook for eurozone industry remains pretty bleak at this point, according to surveys. New orders continue to deteriorate, albeit at a slower pace than a few months ago. And while producers are getting slightly more upbeat, we do not expect that a real turning point in production is likely in the coming months. And any input shortages coming from the Red Sea disruptions won't help. More importantly, demand would need to return and there is still very little evidence of that in the current weak global economy.  

EUR: A new PMI test EUR/USD is around 1.0% cheaper compared to its short-term financial fair value at current levels. Normally, only deviations beyond the 1.5 standard deviation band (+/- 1.5% for EUR/USD) are followed by rapid convergences to the fair value. However, we believe the dollar rallied a bit too far yesterday, and there is some room for EUR/USD to tick back above 1.0900 into tomorrow’s European Central Bank announcement (here is our preview). At the same time, much of today’s price action in the pair will depend on PMIs. French and German figures are published ahead of the eurozone-wide numbers this morning. Expectations are modestly optimistic, with the eurozone composite PMIs seen rising from 47.6 to 48.0, led by marginal gains in both services and manufacturing. PMIs are often assessed in comparison with other countries. In the case of the eurozone, against the US and the UK. The consensus for UK PMIs is for a flat 52.1 (composite) reading. Barring a material surprise in the eurozone print, the lingering divergence between contractionary (EZ) and expansionary (UK) PMIs will keep EUR/GBP pressured today.

Eurozone PMIs show very tentative signs of bottoming out The eurozone economy continues to trend around 0% growth and there are no signs of any imminent recovery. Price pressures are still increasing for the service sector, which provides another argument for the ECB not to hike before June. How you read today’s PMI release for the eurozone reveals whether you’re an optimist or a pessimist. The increase from 47.6 to 47.9 in the composite PMI for January cautiously shows signs of bottoming out but also still indicates contraction. We also note that France and Germany saw declining PMIs, making the increase dependent on the smaller markets. Manufacturing price pressures remain moderate despite the Red Sea disruptions, but the service sector indicates another acceleration in input costs. To us, this shows that the eurozone economy remains in broad stagnation and that risks to inflation are not small enough to expect an ECB rate cut before June. The eurozone continues to be plagued by falling demand for goods and services, although new orders did fall at a slower pace than in recent months. Current production and activity were weaker than in recent months, though, suggesting that January started with contracting output still. The slowing pace of contracting orders does suggest that there is a bottoming out happening though. Whether this is enough to show positive GDP growth in the first quareter depends on February and March. In any case, GDP growth is so close to zero that we still qualify the current environment as broad stagnation anyway. The PMI continues to show some concern around inflation. Even though demand remains lacklustre, services cost pressures are on the rise again due to higher wage costs which are being transferred to consumers. Cost pressures on the goods side remain low despite Red Sea disruptions as energy prices trend lower and demand overall remains weak. This also means that goods inflation continues to trend down according to the survey. So, despite Red Sea problems prominently featuring in the news, inflation concerns currently stem more from services than goods, interestingly. For the ECB, enough worries about inflation not trending down to 2% quickly still remain. We think that makes a first cut before June unlikely.