manufacturing sector

EUR: Can China come to the euro's rescue? EUR/USD has quietly slipped below support at 1.0700/1.0720 and may be gently making its way to the March lows at 1.0515/0530. As we mentioned last week, we think   EUR/USD is relatively cheap given the massive reversal in energy prices over the last year and that, in time, the 1.05/1.07 area will come to be seen as a summer base.   Helping that proposition would be some kind of recovery in China. The release of the China Beige Book has shown some recovery in the China manufacturing sector in May.   Official May Chinese PMI figures are released later this week. A bounceback here, helping to reverse the recent run-up in USD/CNH, could provide the euro with some support.   For today, the eurozone focus will be on the release of industrial and consumer confidence figures for May. Consensus expects some further deterioration here and if so this should keep EUR/USD on the soft side. We will also hear from a raft of ECB speakers today.   Expect more hawkish rhetoric especially in advance of the May eurozone CPI data on Thursday. Consensus expects core eurozone CPI to edge lower to 5.5% year-on-year in May. Another upside surprise here – feeding the sticky inflation narrative – warns that investors could return to pricing a 4.00% ECB deposit rate.   - Chris Turner

The US 2-year yield fell sharply, while the S&P500 ended flat after hitting a fresh high since last summer on optimism that the US will finally agree to raise the debt ceiling.     The House will vote today to decide whether the debt limit bill gets approved at time to get a Senate approval by next Monday deadline.     The deal between Biden and McCarthy freezes discretionary spending for the next two years, which excludes weighty plans like Medicare or social care, and will only have a minor impact on around $20 trillion budget deficit projected for the next decade. Frozen spending means a spending cut in real terms as long as inflation remains high. The higher the inflation, the higher the spending cut in real terms.   But the problem is that at least 20 conservative Republicans of the House rejected Kevin McCarthy's compromise on debt ceiling, saying that spending cuts are not enough. One hardcore Republican, Dan Bishop of North Carolina, threatened to vote to oust McCarthy because he 'capitulated' to Democrats. Democrats, on the other hand, are not fully happy either as they don't want to freeze or to cut spending.     This is what a compromise is: accepting something without being fully satisfied to avoid a self-induced world economic crisis!    Anyway, any misstep at today's House vote could send the US yields higher and stocks lower.     So far, there has been a widening gap between the way the stock and bond markets priced the threat of a US government default. While the US sovereign bonds cheapened across the board, and violently at the short end, stock investors were confident that a ceiling deal would be reached and weren't discouraged by the rising US yields to stop buying.     And even the fact that the Federal Reserve's (Fed) hawkish stance has a material impact on yields' upside trajectory since the bank-stress dip, stock markets kept on climbing. Looking at how Nasdaq behaved since the bank stress rebound in yields, you could barely guess that there are rate-sensitive stocks in it.    But the reality check is that Nasdaq stocks are rate sensitive, and cannot be rate-hike proof if the Fed continues hiking the rates. It would, however, also be a good thing for the Fed members to consider pulling some liquidity out of the market as the Fed's balance sheet is still worth more than before the bank crisis.    What if Russia refuses to cut output?  In energy, US crude tanked nearly 5% yesterday, and tipped a toe below the $69 pb mark on worries that Russia may not follow OPEC's output cuts, in which case the internal conflict may prevent the cartel from reducing supply in a way to give a jolt to oil prices.   There is little chance that we see the kind of discord like back in 2020, as the Ukrainian war strengthen the ties between two allies. But any Russian veto could materially reduce OPEC's power of hit on oil prices.    Elsewhere, the Chinese manufacturing PMI showed that contraction in activity accelerated in May instead of stepping back to the expansion zone. The faster Chinese manufacturing contraction also weighs on the sentiment this morning.     We shouldn't expect China to post growth numbers comparable to levels pre-2020 because China under Xi Jinping's rule is willing to avoid euphoric, and unhealthy growth.   This is why the government put in place severe crackdown measures on real estate, tech and education. That does not mean that China won't get back in shape, but recovery will likely take longer, and growth will likely be more reasonable and a better reflection of the reality of the field.    

History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices in the months ahead.   The services sector, however, is still thriving, enjoying the post-pandemic shift from goods to services. Services most affected by lockdowns are currently experiencing much faster price growth than other services or goods. The upcoming summer holiday period could still fuel service price inflation.   Core inflation has been falling recently, but services inflation has been subdued by German public transport tickets   Still, a key question remains over how long the divergence between goods and services inflation can last. Historically, we don’t see much evidence of a significant difference between the two. Goods inflation actually leads services inflation by approximately six months, which means that the peak for goods from February historically suggests that services inflation is unlikely to remain elevated for the rest of the year. If we are right and the post-pandemic shift ends after the summer holiday period, we could see services inflation starting to come down before the end of the year.     Goods inflation historically leads services inflation by six months   Overall, core inflation seems set to trend down from here on While services inflation continues to see some upside risk for the months ahead, core inflation overall looks set to trend down on the back of slowing goods prices. Even services inflation could already be trending down, but perhaps not as fast as policymakers would like. When looking at selling price expectations for sectors that sell most to consumers, we see that there has been a steady downturn in the number of businesses intending to raise prices. This generally correlates fairly well with core inflation developments seven months later, which would point to a significant slowdown in core inflation. At the current juncture, experts and central bankers will be hesitant to make an outright call for a sharp drop in inflation. The latest track record of inflation forecasting is simply not on their (or our) side. Nevertheless, as much as it was once obvious that the era of low inflation had to end at some point, it's now clear that the short period of surging inflation will also cease sooner or later. Historical evidence and the latest developments in both goods and services give enough comfort to expect both headline and core inflation to decline. We currently expect core inflation to drop below 4% at the end of the year, and for it to be at 2.5% by mid-2024. The risks to that outlook seem to be fairly balanced, as stubborn core inflation on the back of faster wage growth and a quicker drop on the back of weak goods inflation remain decent possibilities.   Business expectations point to moderating core inflation over the second half of the year   Could the ECB fall behind the curve again? For the ECB, this isn't to say that tightening is over. In fact, the central bank can't – and won't – take a chance on this kind of core inflation forecast. Why? Because they've simply been wrong too often in previous years. To put it into ECB language: inflation forecasts are currently surrounded by an unprecedented amount of uncertainty. This is one of the reasons why the central bank has put more emphasis on current inflation developments and less emphasis on its own inflation forecasts for one or two years ahead. While such a strategy supports the ECB’s credibility, by definition it runs the risk of falling behind the curve. Given the time lags with which monetary policy operates and affects the economy, central banks should be forward-looking, not now-looking. This is the theory. In practice, however, the ECB will not change its tightening stance until core inflation shows clear signs of a turning point. Taking all of the above into consideration, this implies that it will not only hike at this week’s meeting but could continue to do so at least until September – at the risk, by that point, of having gone too far.  

EUR: German IFO can keep the euro subdued Friday saw a soft set of PMIs across Europe, where the services sector dipped worryingly towards the gloom already felt in the manufacturing sector. This data set knocked about 50 pips off EUR/USD at the time of the release. Germany's June IFO today could also see a downside surprise and prompt another dip in EUR/USD back below 1.0900.  On the surface, the narrative of central bankers needing to keep higher rates for longer is not a good one for the pro-cyclical euro. However, a hawkish ECB has provided some defence against high US interest rates and has driven EUR/USD back above 1.09 – it will also firm up expectations of at least two more 25bp hikes (in July and September) and perhaps push back against some of the modest easing expected in 2024. This environment tends to favour the continuation of a 1.0850-1.1000 range trade for EUR/USD and the goldilocks scenario of soft landing/softer Fed policy looks to be delayed further. Elsewhere this week look out for a Riksbank rate meeting on Thursday.  Unless it delivers a hawkish hike, EUR/SEK will head back above 11.80.  

Asia week ahead: Australian central bank likely to keep rates on hold The Reserve Bank of Australia (RBA) is likely to keep rates untouched at 4.1%, while inflation reports from the region are likely to show moderating readings.   RBA likely to keep rates untouched at 4.1% Following the surprisingly large fall in May headline CPI inflation to 5.6% year-on-year from 6.8% in April, there seems little prospect of the RBA hiking rates again following what, by its own admission, was a finely balanced decision in June. That hike only got over the line because of the large upward spike in April inflation, so it would seem extremely odd to hike again if inflation surprises on the downside. We are keeping an open mind on one final hike this cycle, and the September meeting looks like the most likely candidate to us. July CPI will have to absorb a large electricity tariff spike of 20% YoY, or more by some estimates, and the base effects are less helpful over the third quarter too. But that will probably be it for the RBA, in our view.   China Caixin PMI numbers to show struggling sector Caixin PMI data will take their cue from the official PMI numbers due out on 30 June. These are likely to show that the manufacturing sector is still struggling, but may also show service sector strength waning, as re-opening pent-up demand starts to normalise again.    India's strong PMI reading points to strong growth Both India’s manufacturing and service sector PMIs are running at extremely strong levels. The manufacturing sector, in particular, has shown an acceleration in recent months, but may now be due a slight correction lower. Not being very exposed to either China or the global semiconductor slowdown is helping India.

China: Non-manufacturing activity slows Official PMI data confirm that the re-opening surge in the service sector is subsiding.   The main engine of growth is spluttering Apart from a short-lived bounce in the manufacturing sector after the zero-Covid measures were shelved in early December 2022, China's manufacturing has been limping along. The official PMI index for the manufacturing sector (which tends to focus on larger, state-owned enterprises) has been below the breakeven 50 level since April. It was not much of a surprise to see it stay in this area in June, though perhaps the fact that the contraction is relatively stable is a source of some comfort. At least things aren't getting noticeably worse.     Instead, it has been the non-manufacturing sector, buoyed by consumer spending, that has been keeping China's economy growing in the first half of this year. But what this data confirms, which we already suspected, is that the initial surge contained a lot of pent-up demand. Domestic tourism, and dining out have been making up for lost time in the early part of the year. But there is only so long that this can go on. Other indicators of retail sales suggest that it remains well above historical trends, and suggests some further moderation over the second half of this year.  Looking at the breakdown of the surveys, there are no particular standouts. Most sub-indices are declining in both manufacturing and non-manufacturing surveys. This includes new orders, new export orders and employment.  Caixin PMI data due early next week will provide more insight into smaller and more export-oriented firms.   China PMI data   PMIs support our GDP downgrade These latest data provide further support for GDP downgrades for the second quarter. They also support the idea that the second half could see weaker support from the service sector. We will be publishing new GDP forecasts next week for China, and these look highly likely to show a cut to the existing full-year GDP figure of 5.7%, and likely take the forecast below the existing consensus forecast of 5.5%. We may still just sit on the right side of 5.0% - the government's target for this year - but that only goes to show what a low hurdle 5% was to achieve after last year's 3% outcome.   The market continues to fixate on the possibility of stimulus measures, and in due course, we do expect the government to step in and provide some support. However, we remain unconvinced that this will resemble anything like the financial bazooka that some want to see, but will instead be more of a buck-shot spray of smaller more targeted measures that may not move the GDP needle substantially. 

Rates Spark: US resilience persists Inflation is what central banks are focused on, but resilient data is lending their hawkish positions more credibility. 10Y UST yields are testing the top of recent ranges after yesterday's data, and it also looks like front-end yields want to reclaim their pre-SVB highs soon. Key to achieving this will be data, and next week holds another busy slate.   US rates on their way to pre-SVB levels As much as inflation is in the spotlight these days, it was the revision to the US first quarter GDP data that elicited the larger reaction from markets yesterday. They were quick to price in a greater chance for a second hike from the Federal Reserve. It had been flagged as a possibility by Fed Chair Jerome Powell only recently in Sintra, but markets were previously reluctant to price it in. Now they see a 40% chance of it happening, even if not as back-to-back increases. The overall US yield curve shifted higher and the curve inversion has deepened further. The 10Y US Treasury yield is now effectively at 3.85%, and the 2Y is back above 4.8%, stretching the 2-10Y inversion back above 100bp. There's room for the 2Y to rise back to 5%, based on the likelihood that the market prices out the rate cut bias just about discounted for the December 2023 meeting and certainly beyond. Through the end of 2024, markets are more than fully discounting five 25bp rate cuts from the peak. Remember the 2Y was above 5% just before the banking turmoil around Silicon Valley Bank ensued. We can still see the 10Y getting back up to the 4% area. Again, back to where it was before the SVB-induced rally in bonds and sell-off in risk. A lot of this has reversed in the past months or so as risk has been bought and market rates have managed to march higher. There had been some flatlining in the past week or so, but data like yesterday’s maintain the upward pressure. Looking ahead at today’s monthly core PCE reading seen coming in at 4.7%, it reminds us that the US is still closer to a 5% inflation economy. We do think inflation will eventually ease, but for now, it is what it is until proven otherwise.   10Y UST yields are testing the upper end of their recent range   A US focused week ahead While the 4th of July holiday has come to mark the beginning of usually quieter summer conditions, the data calendar is still packed with key releases. Yesterday has highlighted the degree to which the credibility of the Fed’s higher-for-longer narrative hinges on the data. If activity refuses to lie down yields can only rise further.   The first key data set will be the ISMs, in particular the services report on Thursday. Recall that the May report had seen a big downward surprise falling to 50.3 from 51.9, with weaker readings in the past 14 years only seen during the pandemic in 2020. Even the employment sub-component had dropped to below 50, contradicting the earlier strong payrolls report. All eyes will be on whether the services sector joins the manufacturing sector, which looks like it is already in recession with its seven consecutive sub-50 readings. For now, the consensus is for the services report to increase to 51.1. The manufacturing report for June will be out on Monday. The final data highlight is the June employment report. May had seen an extraordinarily strong report with a non-farm payrolls increase of 339k – but it was also a mixed report, with the employment rate jumping to 3.7% and moderating wage growth. For June, the consensus is eyeing a 213k payroll increase and unemployment easing back to 3.6%.   Today's events and market views Inflation data is today’s main focus, both in the eurozone and in the US. As far as the eurozone flash CPI is concerned – where consensus is looking for a 5.6% year-on-year headline and a higher 5.5% core reading – country data over the past days has already provided some indication, with German inflation coming in higher than consensus for instance. In the US, the Fed's favoured inflation measure, the core PCE reading, is expected to stay at 4.7% YoY. The headline rate is expected to drop to 3.8% from 4.4% previously. The upshot from both US and eurozone data should be that the central banks' jobs are far from over, although the backdrop for the Fed does look comparatively more encouraging than for the European Central Bank.  In primary markets, we will only see Italy being active today with 5Y, 10Y and 30Y bond taps of up to €7.5bn in total. 

Manufacturing PMIs point to contraction across the eurozone but euro remains steady US ISM Manufacturing PMI weakens US PCE Index slows but Fed still expected to hike in July EUR/USD is almost unchanged on Monday, trading at 1.0909.   Eurozone manufacturing continues to sputter The eurozone manufacturing sector has been in poor shape for months and the downturn worsened worse in June. The eurozone PMI slowed to 43.4 in June, down from 44.8 and shy of the consensus of 43.6 points. Germany, the largest economy in the bloc, looked even worse, as the PMI fell to 40.6, down from 43.2 and below the consensus of 41.0 points. Spain, Italy and France also reported readings below 50, which separates contraction from expansion. Manufacturing in the eurozone has now contracted for 12 straight months and the PMI reading was the lowest since May 2020. Customer demand has fallen sharply and manufacturing employment declined in June for the first time since January 2021. These latest numbers indicate that manufacturing is in trouble, but this is nothing really new and the euro shrugged off the weak numbers. The news wasn’t much better in the US, as ISM Manufacturing PMI eased to 46.0 in June, down from 46.8 in May. ISM Manufacturing Employment contracted as well, falling from 51.4 to 48.4 and missing the consensus of 50.5 points. The week wrapped up with inflation releases showing that deceleration is alive and well. On Friday, the PCE Price Index, which is the Fed’s preferred inflation indicator, declined from 0.4% to 0.1% in June. As well, UoM Inflation Expectations dropped to 3.3% in June, down from 4.2% in May and the lowest since March 2021. Inflation may be headed in the right direction, but the Fed is still widely expected to raise rates at the July 12th meeting. Traders have priced in a 25-basis point hike at 86%, according to the CME FedWatch tool.   EUR/USD Technical EUR/USD is putting pressure on support at 1.0908. This is followed by support at 1.0838 1.0980 and 1.1050 are the next resistance lines    

Rates Spark: Transmission issues A weak US sentiment index failed to snap the curve flattening trend, as markets keep their powder dry ahead of labour market data. Attempts to engineer a steeper euro curve are set to result in greater risk premia elsewhere.   Curve flattening remains the market's default mode The fall in the June US ISM Manufacturing from already worrying levels at least prevented US yields from mounting another attempt at rising to new post-SVB highs. One has to wonder how much appetite for new risk there was in a reduced hours session yesterday and ahead of the Independence Day holiday today. More fundamentally, despite conventional wisdom suggesting that the manufacturing sector provides an early read of future activity, markets have been wrong-footed before. We wouldn’t be surprised if some investors kept their powder dry ahead of the more immediately relevant labour market indicators due to be published on Friday.   Probably also due to the market’s focus on labour market indicators, the ISM release didn’t allow the curve to snap its flattening streak. Besides the, justified in our view, macro rationale for the move, such a notable tendency to flatten regardless of rates going up or down suggests heavy flow in that direction. The new Bank of England (BoE) member Meghan Greene was also responsible for adding some hawkish fuel to the fire in an FT column.   Unless it replaces rate hikes, QT stands little change of re-steepening the curve

  The disinflationary trend in the eurozone has started and should gain more momentum after the summer. It will take a while but core inflation should follow suit as well.   Slowly but surely, the inflation outlook for the eurozone is improving. Base effects as well as fading supply chain frictions and lower energy prices have and will continue to push down headline inflation in the coming months – a drop that the European Central Bank deserves very little credit for orchestrating. With headline inflation gradually normalising, the big question is how strong the inflation inertia will be. As long as core inflation remains stubbornly high, the ECB will continue hiking interest rates. How long could this be?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply, which is widely expected to continue over the months ahead. The decline in natural gas prices has been remarkable over recent months and while it would be naïve to expect the energy crisis to be over, this will result in falling consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there will be more to come in terms of the downward impact on inflation. The same holds true for food. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slow. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Headline inflation – at least in the absence of any new energy price shocks – looks set to slow down further, but the main question now is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 1980s are not available for many countries, but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 1970s and 1980s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices over the coming months.      

Recent PMI readings in the European economy have raised concerns about the future of the region. The Euro area composite PMI dipped below the 50-point mark, indicating a contraction for the first time this year. This significant shift in momentum suggests a potential 3 to 6-month period of economic decline.  The tightening monetary policy by the European Central Bank (ECB) aimed at reducing inflation has contributed to these contracting indicators. The drop in composite PMI was driven by a decline in both manufacturing and services PMI, with manufacturing consistently below the expansion territory. However, services PMI still remains in expansion, although a continued decrease could indicate contracting business confidence. Job creation in the Euro area remained limited to the services sector, while employment in factories declined for the first time in over two years. This slowdown in hiring, coupled with a decrease in business confidence, may lead to rising unemployment rates. On a positive note, the weakness in PMI readings can be partly attributed to destocking activities, which can benefit businesses in the long run. Additionally, there have been slight improvements in new order numbers, particularly in Italy's construction sector, suggesting a potential turnaround. These dynamics will likely influence the ECB's monetary stance moving forward.   FXMAG.COM:  How would you comment on the entire series of PMI readings from the European economy? What do the sentiment in industry and services say about the future of the European economy?   Santa Zvaigzne-Sproge, CFA: The Euro area composite PMI came out below the 50-point level indicating that it has entered the zone of contraction for the first time this year. This was a considerable change in momentum in comparison to April’s reading of 54.1 and even the previous month’s reading of 52.8. Furthermore, the historical data show us that once the PMI slides below the 50-point mark, it tends to stay there for a 3 to 6-month period. As tightening monetary policy by the ECB has been performed with the key aim to draw down inflation by reducing economic activity, contracting economic indicators such as PMI may not be a big surprise.    The drop in composite PMI resulted from a combination of lowering manufacturing PMI and services PMI data. However, the difference between both is nearly 10 points with services PMI still being in the expansion territory while manufacturing has not been there since August 2022. The large difference might be partially explained by the nature of both sectors. Manufacturing generally implies more capital intensity and longer production times, therefore, requiring more planning ahead, while services may be more flexible and adapt faster. However, if the services PMI data continues to lower, it may indicate that business confidence is contracting also in this sector.    In June, private companies in the Euro area maintained their efforts to expand their workforce, but job creation was limited to the services sector, while employment in factories declined for the first time since January 2021. The slowdown in hiring coincided with a decrease in business confidence across the Euro area. While firms maintained an optimistic outlook, the level of positive sentiment reached its lowest point in 2023 thus far. Growth expectations also softened in both the manufacturing and services sectors. In case job growth continues to stagnate, it may translate into increasing unemployment rates across the Euro area, which may give the ECB a reason to reconsider its hawkish monetary stance.    To finish on a more positive note, we need to point out that the weakness in PMI readings has been partially associated with destocking, leading to lower new order numbers. While negatively affecting PMI numbers, destocking may be considered as cyclical activity performed by managers beneficial to their businesses. Furthermore, destocking cannot last endlessly – once the stock levels reach a certain point, new orders may need to go up to support the “restocking”. There has been a somewhat positive development in this section in Italy where according to the latest construction PMI report, new orders increased marginally ending the six-month-long strike of contraction.  Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service) Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73,02% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

As Germany holds the position of the largest economy in the European Union and is renowned as one of the world's leading manufacturing powerhouses, recent data concerning its manufacturing sector has raised concerns among investors. With Germany already experiencing a technical recession since the first quarter of 2023, there are growing uncertainties about the depth and duration of the downturn. To shed light on these matters, we engage in a conversation with Santa Zvaigzne-Sproge, CFA, to assess the latest data from German industry and its potential implications. The manufacturing Purchasing Managers' Index (PMI) indicators for both Germany and the entire Euro area are currently situated in the contraction territory, indicating the challenges faced by the manufacturing sector. High inflation and elevated credit costs have led to a decline in private consumption, further impacting manufacturing numbers. Until these factors normalize, a return to expanding private consumption may be hindered.   FXMAG.COM:  How do you assess the latest data from German industry? Do they hint that the recession in Germany will be deep and prolonged?    Santa Zvaigzne-Sproge, CFA:  As Germany is the largest economy in the European Union and is considered among the strongest manufacturing powerhouses in the world, the latest manufacturing data may cause some worry among investors.  Germany has been in a technical recession since the first quarter of 2023 and is expected to continue the contraction at least till the end of 2023. However, for the technical recession to be over in Germany by the end of 2023, we should start seeing some improvement in economic indicators such as the PMI soon. Meanwhile, both – Germany’s and the whole Euro area’s – manufacturing PMI indicators are deep in the contraction territory.    Private consumption in Germany has fallen mainly due to high inflation and more expensive credit, which has led to lower manufacturing numbers. Therefore, until neither of the factors has normalized, private consumption may not return to a more expanding territory.    Until now, the German economy’s contraction has been relatively mild with -0.3% GDP growth in the first quarter. However, comparing it to the initially expected +0.3% and the preliminary estimate of -0.1%, we may see that the actual data tend to turn out worse than expected. The GDP growth estimate for a full 2023 year in Germany now stands at -0.4%, however, it might be revisited as the second quarter GDP growth estimates start coming in.    On the bright side, German companies hired people at a faster pace in June than one month ago (which cannot be said about France, Italy, or Spain). Healthy employment is an important factor to support private consumption and at the same time an indicator that recession in Germany is kept at a relatively mild level.    To sum up, current German PMI data do not signal that a turnaround in the second quarter GDP growth data is likely. This may lead to slightly lowered expectations for full-year GDP growth in Germany. However, the length of a recession in Germany may be hard to assess based on the PMI data. It may be more dependent on future monetary and fiscal decisions by policymakers in the rest of the year’s time.   

Higher interest rates dampen prospects for investment goods Higher interest rates and moderate sales expectations are inhibiting the need for expansion investments. This applies to both the manufacturing sector itself and the demand from sectors such as construction, which is experiencing a decline in investments in homes and commercial buildings. Financial surveys also indicate a decrease in investment demand. In the first quarter of this year, investments in ICT equipment and machinery and other equipment in the Netherlands decreased by 6.2% and 0.6%, respectively. Overall, investments are under pressure this year and next, negatively affecting the demand for industrial investment goods such as machinery and equipment. However, investment expectations in the industrial sector itself are still relatively high due to sustainability requirements, capacity constraints – especially in the technological industry – and the need for expanding digitisation, automation, and robotics to mitigate the impact of labour shortages.   Many industries are still working overtime, while energy-intensive production is on the backburner Deviation of current occupancy rate from long-term average, in percentage points       Energy gap is closing, but growth remains subdued The energy-driven growth gap between industry sectors is gradually disappearing. Nevertheless, we do not expect energy-intensive production to return to previous levels in the near future. Growth is being held back by economic headwinds and energy prices are expected to remain structurally higher than before. All in all, a slight contraction (-1.0%) in 2023, followed by moderate growth (1.5%) in 2024 seems the most likely scenario for Dutch manufacturing.

New Zealand’s central bank takes a pause after 12 consecutive hikes New Zealand Manufacturing PMI expected to show manufacturing is stalled US inflation expected to decline to 3.1% The New Zealand dollar showed some gains after the Reserve Bank of New Zealand paused rates, but has given up most of those gains. In the European session, NZD/USD is trading at 0.6206, up 0.14%.   RBNZ takes a breather There was no dramatic surprise from the RBNZ, which kept interest rates on hold at Wednesday’s meeting, as expected. The central bank has been aggressive, raising rates 12 straight times since August 2021 until Wednesday’s meeting. This leaves the cash rate at 5.50%. The RBNZ had signalled that it would take a break, with Deputy Governor Hawkesby stating last month that there would be a “high bar” for the RBNZ to continue raising rates. Today’s rate statement said that interest rates were constraining inflation “as anticipated and required”, adding that “the Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range.” The RBNZ did not issue any updated forecasts or a press conference with Governor Orr, which might have resulted in some volatility from the New Zealand dollar. The central bank has tightened rates by some 525 basis points, which has dampened the economy and chilled consumer spending. Is this current rate-tightening cycle done? The central bank would like to think so, but that will depend to a large extent on whether inflation continues to move lower toward the Bank’s inflation target of 1-3%. The pause will provide policymakers with some time to monitor the direction of the economy and particularly inflation. If inflation proves to be more persistent than expected, there’s every reason to expect the aggressive RBNZ to deliver another rate hike later in the year. New Zealand releases Manufacturing PMI for June on Wednesday after the rate decision. The manufacturing sector has contracted for three straight months, with readings below the 50.0 line, which separates contraction from expansion. The PMI is expected to rise from 48.9 to 49.8, which would point to almost no change in manufacturing activity. The US will release the June inflation report later in the day. Headline inflation is expected to fall from 4.0% to 3.1%, but core CPI is expected to rise to 5.3%, up from 5.0%. If core CPI does accelerate, that could raise market expectations for a September rate hike. A rate increase is all but a given at the July 27th meeting, with the probability of a rate hike at 92%, according to the CME FedWatch tool.   NZD/USD Technical 0.6184 is a weak support level. Below, there is support at 0.6148 0.6260 and 0.6383 are the next resistance lines  

Austria's competitiveness will suffer Increased costs are having a negative impact on competitiveness, not only in services but also in the manufacturing sector. Most Austrian exports are machines and vehicles, followed by processed goods and chemical products. While the competitive outlook for vehicles has improved recently, the results of DG ECFIN's industry survey in both the energy-intensive chemical products sector and the machinery sector point to a loss of competitiveness, both in relation to countries within and outside the EU. Until the green transformation has comprehensively arrived in Austrian industry, no growth miracles are to be expected for Austrian industry or foreign trade. Consequently, the overall economic outlook is far from rosy. We expect economic growth in Austria to be significantly below potential both this year and next. Accordingly, the government debt ratio, which stood at 78.4% at the end of 2022, is likely to decline only slowly. After all, despite the frequent calls for a return to budget discipline, there has been no talk so far of either tax increases or significant spending cuts. Overall, the outlook for the Austrian economy is clearly clouded and persistently high inflation will be an additional burden this year and next.   The Austrian economy in a nutshell (%YoY)

Firing on all cylinders? Not quite In addition to household consumption, investment has remained volatile and has been impacted by a few large transactions in the shipbuilding industry. This largely explains the solid growth seen in the first quarter of this year. On the contrary, the contribution of net foreign trade to growth remains negative. This can be explained by imports holding up well on the back of solid domestic demand while the export sector copes with weak foreign demand and is also reflected on the supply side by the prolonged contraction in manufacturing activity (as detailed in the graph below). In short, the Belgian economy is not currently performing at its peak level. On the demand side, domestic demand alone is fuelling growth. On the supply side, only the services sector is still showing signs of growth as industry remains in recession. We should also point out that the ECB's restrictive monetary policy is weighing on household investment in housing, which fell by no less than 4.2% year-on-year in the first quarter of 2023. Nevertheless, activity in the construction sector continues to grow (+2.2% in the first quarter of this year), thanks to other developments in conversion, non-residential buildings and infrastructure.   Manufacturing sector in recession Quarterly GDP growth decomposition, supply side   Threat to competitiveness The fact that the Belgian economy has a less volatile cycle than the eurozone average is nothing new. As we are currently seeing, growth is more resilient in periods of economic weakness. Unfortunately, this is also accompanied by a lack of vigour throughout periods of recovery. In addition to factors currently impacting the eurozone economy as  a whole (weakness in global industry, restrictive monetary policy), two key concerns are mounting in Belgium's case. These concerns are nothing more than the other side of the coin of the elements currently underpinning the solidity of the Belgian economy, but they could have a negative and lasting impact on growth. Firstly, economic developments in recent quarters have led to a loss of competitiveness for the Belgian economy. The automatic indexation of wages has meant that they have risen faster in Belgium than in neighbouring countries. Negotiated nominal wage increases this year could narrow the gap between these countries and Belgium, but they will not fully compensate for it. While the strength of the labour market is a good thing for the economy and the improved financial health of households, it is also currently translating into a decline in productivity. On the one hand, there are negative productivity gains within certain sectors. This is particularly evident within the manufacturing sector, where employment grew by 0.8% between March 2022 and March this year, while the sector's value added fell by 2.4%. On the other hand, we're seeing a composition effect on productivity. A large number of jobs are being created in low-productivity sectors (leisure, healthcare, public sector), while fewer jobs are being created in high-productivity sectors – some of which are even losing jobs (the financial sector, for example). Since productivity is an essential factor in the competitiveness of an economy, recent trends are jeopardising the Belgian export sector's ability to maintain its market share

Austria's competitiveness will suffer Increased costs are having a negative impact on competitiveness, not only in services but also in the manufacturing sector. Most Austrian exports are machines and vehicles, followed by processed goods and chemical products. While the competitive outlook for vehicles has improved recently, the results of DG ECFIN's industry survey in both the energy-intensive chemical products sector and the machinery sector point to a loss of competitiveness, both in relation to countries within and outside the EU. Until the green transformation has comprehensively arrived in Austrian industry, no growth miracles are to be expected for Austrian industry or foreign trade. Consequently, the overall economic outlook is far from rosy. We expect economic growth in Austria to be significantly below potential both this year and next. Accordingly, the government debt ratio, which stood at 78.4% at the end of 2022, is likely to decline only slowly. After all, despite the frequent calls for a return to budget discipline, there has been no talk so far of either tax increases or significant spending cuts. Overall, the outlook for the Austrian economy is clearly clouded and persistently high inflation will be an additional burden this year and next.   The Austrian economy in a nutshell (% YoY)

Eurozone industrial production confirms no strong GDP bounce back for 2Q With more data coming in, it really seems to be a coin flip as to whether the eurozone technical recession continued into the second quarter. The May production data is consistent with industry stagnating at a relatively low level of activity.   Industrial production increased by 0.2% in May, which is the second small increase in a row after plummeting in March. Overall, this leaves the level of activity well below the average for where it was in 2022, in line with a weakening global growth environment in which demand for goods has moderated. In recent months, industrial production has stagnated. There are large differences by sector, which is due to the shocks that individual sectors have been influenced by in recent years. At the moment, the sectors most hurt by supply-chain problems are still contributing positively to annual industrial production growth. The sectors that profited a lot from the pandemic – think of pharma for example – are showing more volatile production performance at the moment and energy production and energy-intensive sectors are contributing negatively. For the months ahead, weakness continues to be in the cards as surveys point to a drying up of backlogged orders and new orders are weakening. Global demand is going through a weak patch and that is reflected by a subdued outlook for the manufacturing sector. For GDP growth in the second quarter, the impact is clear. Production will have needed a strong rebound in June to have an average production level similar to the first quarter. That seems unrealistic given the negative PMI and industrial sentiment data for the month. Another quarterly decline for industrial output is therefore in the making, which is also likely for retail sales. The goods part of the economy is therefore likely to have remained in recession and services – on which we have much less intermediate data – will have needed to perform well to eke out a positive growth figure. It’s likely that the eurozone economy has therefore continued to straddle the zero growth line in the second quarter, extending the current phase of stagnation in economic activity.

  US Retail Sales (Jun) – 18/07 – US retail sales growth has been broadly steady for the most part during Q2, rising 0.4% in April and 0.3% in May. All the while consumer confidence has been increasing while inflation expectations have been falling. All of this should make for a more positive headwind for US consumer spending. Expectations for June retail sales are for a gain of 0.4%, against a backdrop of a still resilient jobs market, despite concerns that the manufacturing sector slowdown will start to act as a significant drag on the more resilient services sector. Ocado H1 23 – 18/07 – having narrowly avoided being relegated to the FTSE250 in the last reshuffle Ocado shares recently jumped to their highest levels in March, as chatter about a possible Amazon bid drove speculation in the share price. One of their largest shareholders Lingotto Investment Management increased its stake in the business to 5% fuelling speculation that something might be afoot, especially given the lack of any pushback on the speculation by either Amazon or Ocado. In Q1 Ocado reported revenues of £584m a rise of 3.4% on last year, while average orders per week have risen 3.6% to 381k. Average basket value remained flat, despite a fall in basket size and a rise in active customers to 951k, a rise of 13.8% year on year. This trend continues to show that with ever rising prices Ocado customers, like a lot of other retailers, are spending more money and getting less. Ocado kept its full year guidance unchanged.           

Dollar wavers post Chinese data 10-year Treasury yield down 2.3 points to 3.809% JPMorgan extends gains post Friday’s earnings US stocks are slightly higher after some disappointing Chinese GDP data raised concerns about the global economy but supported the argument that disinflation pressures are firmly in place.  The disinflation story won’t be going away after Ford announced some big cuts with their electric F-150 truck prices.  The disinflation process should remain intact and that should support calls that the Fed will be done after one more rate hike at the end of this month.  Wall Street is bracing for some big bank earnings that might not mirror what JPMorgan said last week. The key to the stock market remains the mega-cap tech trade and many traders won’t do any major positioning until we hear from Netflix and Tesla.     China’s slowdown dragged European stocks.  Another record high for China’s youth unemployment won’t do any favors for demand for European goods in the coming months.  China still expects growth around 5% to be reached but that will be hard unless the PBOC delivers more stimulus.    US Data The first Fed regional survey showed that NY state factory activity managed to stay in expansion territory, while prices paid fell to the lowest levels since August 2020.  The headline general business conditions index dropped 6 points to 1.1. The manufacturing sector is expected to rebound here despite a slight rise with new orders and as shipments expanded.  The report noted that optimism remained subdued and that capital spending will remain soft.      The rest of the Fed regional surveys will likely show overall weakness in the manufacturing sector, along with optimism that pricing pressures are easing.    

Mixed US activity picture supports July hike then another pause Retail sales grew in June but these are dollar values and in volume terms, spending appears lacklustre. Meanwhile, with the manufacturing sector languishing and inflation showing encouraging signs of slowing, the widely-anticipated July Federal Reserve interest rate hike may be the last.   Retail sales indicate a mixed spending picture US June retail sales are a little bit softer than expected at the headline level, rising 0.2% month-on-month versus the 0.5% consensus expectation, but May's figure was revised up to 0.5% MoM growth from 0.3%. Meanwhile, the "control group" which strips out the volatile auto, building materials, gasoline and food service components was better-than-hoped, rising 0.6% MoM versus 0.3% consensus. There was also a 0.1pp upward revision to May for this series. This is important as this stripped-down version of retail sales tends to have a better correlation with broader consumer spending trends over time. The details show auto sales were weaker-than-expected (+0.3% MoM), given decent unit volume figures from manufacturers, while gasoline station sales surprisingly fell despite rising prices. It was a good month for furniture (+1.4% MoM) and electronics (+1.1% MoM) and miscellaneous (+2%) and internet (+1.9%), but building materials fell 1.2%, sporting goods were down 1% and department store sales fell 2.4%, indicating a very mixed picture for spending.   Challenges mount as credit support fades and student loan repayments restart Looking at it in year-on-year percentage terms, retail sales are up 1.7% in aggregate while the "control group" is up 4.3%, but these are nominal dollar figures so accounting for inflation, sales volumes are pretty lacklustre. Moreover, weekly Johnson Redbook sales are in negative territory YoY in early July - also a dollar value figure. This tends to lead the official retail sales numbers, so doesn't bode well. Nor does the softness in restaurant dining, which according to Opentable is running at -2% YoY for July month-to-date.   Weekly Redbook sales point to decelerating retail activity (YoY%)   Also check out the softer consumer credit numbers that have been coming through, for example rising only $7.2bn in May versus the $20bn consensus and the outright consecutive declines in the stock of consumer credit provided by commercial banks in the US over the past three weeks. With student loan repayments also restarting in the next few months the challenges facing the retail sector appear to be mounting, with a further slowing in consumer activity looking like the most likely path ahead.   Softer data indicates manufacturing recession Unfortunately, US industrial production was much weaker than anticipated in June, falling 0.5% MoM versus expectations of 0% growth. Manufacturing output fell 0.3% MoM rather than coming in flat as predicted while mining fell 0.2% and utility output dropped 2.6%. We know that the ISM has been in contraction territory for the past eight months and we know that the Baker Hughes oil and gas rig count has fallen heftily over the past three months (from 748 at the beginning of March to 675 as of last week – the lowest since April 2020 when spot prices for oil were turning negative). Given this, we aren't expecting an imminent rebound in output from the manufacturing or mining sectors.   US manufacturing output versus the ISM index   July utility output will be up sharply though, with AC units in overdrive, and this is the only hope for a positive number for industrial activity. So with the activity backdrop for the US looking more mixed and the inflation story looking more favourable, the data seemingly supports the narrative of the Fed hiking rates again in July, but pausing again in September, perhaps for a number of months.

China: PMI’s show non-manufacturing growth slowing further The decline in manufacturing eased slightly in July, but the non-manufacturing sector showed a larger-than-expected slowdown in growth and further falls could see it skirting with contraction.   At this rate, the service sector will join manufacturing in contraction China's official PMI data provides little encouragement that the economy is turning the corner. And while the authorities have been vocal in their support for the economy, so far, that has not translated into the sort of sizeable fiscal policy stimulus many in the market have become used to expecting. We don't think it is coming.  The key figure in today's release is the non-manufacturing sector PMI. This fell from 53.2 to 51.5, with 50 representing the threshold between growth and contraction. A further fall like the one we saw this month could push the non-manufacturing sector close to contraction, joining the manufacturing sector, which, while it improved slightly from a month ago, at 49.3 remains in negative territory.    Headline PMI indices   Prospects for the non-manufacturing sector aren't great Looking at the breakdown of the non-manufacturing sector, what strikes you is that most of the sub-components are already showing contraction. The one component that stands out from the rest, is expectations, which looks like an unrealistic outlier compared with what is going on elsewhere.  We can only put this down to continued hope that the government will pull something out of the bag that will re-invigorate the economy. However, while we believe that a great many micro measures will be implemented to improve the functioning of the economy, including a reduction in constraints on the private sector, we aren't at all convinced that there is a fiscal bazooka waiting to fire up the economy. So, if those expectations aren't fulfilled and begin to wilt, then this PMI could well join the manufacturing sector in contraction.   Tomorrow, the Caixin PMI data will provide another insight into the more private-sector and export-oriented parts of China's economy.    Non-manufacturing PMI components

FX Daily: RBA's pause isn't the endgame The Reserve Bank of Australia held rates for a second consecutive month, but we still think there is a chance the bank will hike one last time in September on the back of an inflation surprise. In the US, surveys will test the soft-landing story, but the dollar may stay 'trapped' amid low FX volatility for now.   USD: Still fighting for direction We have recently made the case for the dollar to stay “trapped” in a situation where FX volatility fails to pick up, leaving room for carry trades to keep supporting high-yielders and weigh on funding currencies. The greenback probably needs some compelling evidence against the soft-landing narrative in the coming days to break lower. Today will be the first occasion to put that narrative to the test this week. The US manufacturing sector has been in contractionary territory since November 2022, and the consensus expectations for a mild rebound from 46 to 47 this month may not have major market implications. We think JOLTS job openings data have a greater potential to move investors’ sentiment today, with the consensus already positioned for a cool-off in the hiring market. On the Fedspeak side, we’ll hear from Chicago Fed President Austan Goolsbee. One data release that went slightly under the radar yesterday, but in our view contained key forward-looking information, was the Federal Reserve’s Senior Loan Officer Opinion Survey. As discussed by our US economist here, the survey pointed at a further tightening in US lending conditions and how both households and businesses are now warier about taking on additional borrowing. Given the centrality of credit flow to the US economy, this increases the probability of a faster return to target inflation. Outside of the US, China continued to print disappointing data: the latest being July’s Caixin PMI manufacturing, which fell more than expected into contraction territory (49.2). This has set the stage for a risk-off-leaning environment in FX this morning, which can favour some modest dollar recovery into the US data releases and help DXY consolidate above 102.00, before facing harder data-related tests (ISM services and jobs report later this week).

RBA pauses rates Australian dollar slides 1.3% ISM Manufacturing PMI expected to remain in negative territory The Australian dollar continues to swing wildly this week. In Tuesday’s European session, AUD/USD is trading at 0.6630, down 1.30%. On Monday, AUD/USD jumped 1% higher.   RBA pauses rates, as expected There were no surprises from the Reserve Bank of Australia, which paused for a second straight month and maintained the cast rate at 4.10%. The money markets had priced in a pause but the Australian dollar still took a nosedive after the decision, as the money markets have lowered the probability of a rate hike in September to below 20%. Recent key data showed that the Australian economy has cooled off, with inflation easing in the second quarter and retail sales for June falling by 0.8%. These numbers provided support for the RBA to take a pause at today’s meeting. Still, the argument can be made that with inflation at 6%, double the upper band of the RBA’s target range, there is room for further rate hikes. The RBA did not change its inflation outlook, predicting that inflation would not return to the 2%-3% target range before late 2025. Services inflation, which includes rising rent prices, remains sticky and this is a key concern for the central bank. Governor Lowe’s rate statement said that future rate decisions “will depend upon the data and the evolving assessment of risks.” This is a reminder that inflation and employment reports will play a key role in determining the RBA’s rate path. There is speculation that the RBA is done with tightening, but with inflation still at high levels, Lowe’s message to the markets was that further hikes remain on the table. In the US, today’s key event is ISM Manufacturing PMI. The manufacturing sector remains in the doldrums and has been in decline since October, with readings below the 50.0 level. In June, the Manufacturing PMI slipped to 46.0, the lowest level since May 2020. Another decline is expected for July, with a consensus estimate of 46.8 points.   AUD/USD Technical AUD/USD has pushed below support at 0.6697. Below, there is resistance at 0.6573 There is resistance at 0.6771 and 0.6875  

The Japanese yen continues to slide and is down 1.41% this week. In Tuesday’s European session, USD/JPY is trading at 143.16, up 0.64%.   Dollar/yen powers above 143 The yen continues to lose ground against the US dollar. Earlier in the day, the yen weakened to 143.18, its weakest level against the US dollar since July 7th. The yen has plunged 370 basis points since Friday when the Bank of Japan stunned the markets and tweaked its yield control (YCC) policy. The Bank of Japan has loosened its YCC and this has sent the yen sharply lower. The BoJ had set a rigid cap of 0.50% yields on 10-year government bonds but has turned that cap into a yardstick, saying it would offer to purchase JGBs at 1%. The 10-year yield rose has risen to a multi-year high of 0.61% and there is a strong possibility of the yield continuing to rise. The BoJ has been an outlier of central banks, sticking to its policy of negative rates. True, inflation in Japan is much lower than in other developed economies, but there is growing criticism that this policy is outdated and the central bank needs to take further steps toward normalization. Governor Ueda stressed on Friday that the YCC tweak was not a move towards normalization and we’re unlikely to see any tightening from the BoJ unless inflation moves significantly higher.   In the US, ISM Manufacturing PMI is today’s key release. The manufacturing sector remains in the doldrums and has been in decline since October, with readings below the 50.0 level. Demand has been weak and production has been declining due to the lack of orders. In June, the Manufacturing PMI slipped to 46.0, the lowest level since May 2020. Another decline is expected for July, with a consensus estimate of 46.8 points. . USD/JPY Technical USD/JPY has pushed above resistance at 142.63. Above, there is resistance at 144.09 There is support at 141.47 and 140.35  

RBA pauses rates Australian dollar slides 1.3% ISM Manufacturing PMI expected to remain in negative territory The Australian dollar continues to swing wildly this week. In Tuesday’s European session, AUD/USD is trading at 0.6630, down 1.30%. On Monday, AUD/USD jumped 1% higher.   RBA pauses rates, as expected There were no surprises from the Reserve Bank of Australia, which paused for a second straight month and maintained the cast rate at 4.10%. The money markets had priced in a pause but the Australian dollar still took a nosedive after the decision, as the money markets have lowered the probability of a rate hike in September to below 20%. Recent key data showed that the Australian economy has cooled off, with inflation easing in the second quarter and retail sales for June falling by 0.8%. These numbers provided support for the RBA to take a pause at today’s meeting. Still, the argument can be made that with inflation at 6%, double the upper band of the RBA’s target range, there is room for further rate hikes. The RBA did not change its inflation outlook, predicting that inflation would not return to the 2%-3% target range before late 2025. Services inflation, which includes rising rent prices, remains sticky and this is a key concern for the central bank. Governor Lowe’s rate statement said that future rate decisions “will depend upon the data and the evolving assessment of risks.” This is a reminder that inflation and employment reports will play a key role in determining the RBA’s rate path. There is speculation that the RBA is done with tightening, but with inflation still at high levels, Lowe’s message to the markets was that further hikes remain on the table.   In the US, today’s key event is ISM Manufacturing PMI. The manufacturing sector remains in the doldrums and has been in decline since October, with readings below the 50.0 level. In June, the Manufacturing PMI slipped to 46.0, the lowest level since May 2020. Another decline is expected for July, with a consensus estimate of 46.8 points.   AUD/USD Technical AUD/USD has pushed below support at 0.6697. Below, there is resistance at 0.6573 There is resistance at 0.6771 and 0.6875    

If you're an ardent follower of cryptocurrency trends, you'll probably have heard of Peter Brandt. Brandt, a famed commodity trader, etched his name in the annals of crypto history when he predicted the Bitcoin crash of 2018. His uncanny foresight was validated when Bitcoin's value plummeted from a high of nearly $20,000 to below $4,000 that year. Now - Brandt has sent out a new warning about investing in Bitcoin, sparking a ripple of concern among investors.   Who is Peter Brandt?   Peter Brandt is more than a celebrated commodities trader; he's an esteemed personality in the world of finance with a successful trading career spanning over forty years. He made his mark in the late 1970s by demonstrating an exceptional knack for anticipating market trends and movements. Brandt expanded his professional reach by becoming an author, imparting his deep understanding to a broader audience. His seminal work, "Diary of a Professional Commodity Trader," brought to light by Wiley in 2011, is considered a must-have resource for those interested in delving into the complexities of commodity trading. The book serves as a journey through Brandt's personal trading history, providing a candid peek into the high-risk world of trading. Beyond trading and authorship, Brandt is the founding head of Factor LLC, his proprietary trading company, where he disseminates his market assessments and potential trading strategies. His followers highly regard his technical analysis charts, which have garnered a significant audience on social platforms, solidifying his status as a reliable voice in the industry.   The 2018 Prediction and Its Realisation   When Brandt predicted Bitcoin's 2018 crash, he cited key market patterns and trends that seemed to suggest an impending downturn. One pattern was a 'parabolic advance' - a steep, curved upward trend that Bitcoin exhibited leading up to the 2018 crash. Parabolic advances have historically been associated with unsustainable market bubbles, so spotting this pattern was a key reason behind Brandt's forecast.   Brandt also noted the euphoric sentiment surrounding Bitcoin, which was reminiscent of other historic market bubbles. The rampant speculation, combined with the lack of a tangible underlying asset, were strong indicators of an unsustainable price level.   His prediction was shockingly accurate. Bitcoin's value dropped by more than 80% in a year, falling from nearly $20,000 in December 2017 to below $4,000 by December 2018. This crash validated Brandt's forecast, proving his proficiency in understanding and predicting market trends.   The Aftermath and Recovery   Despite the severe crash, Bitcoin showed its resilience and rebounded in the subsequent years. In 2019, Bitcoin embarked on a recovery path, closing the year at around $7,200, a significant increase from its low point the previous year.   The year 2020 brought further growth, with Bitcoin's value more than tripling. The global pandemic played a role in this surge, as economic uncertainties and inflationary fears drove many investors towards Bitcoin as a 'digital gold' and hedge against traditional market instabilities.   In 2021, Bitcoin reached unprecedented heights, crossing the $60,000 mark, propelled by institutional acceptance, technological advancements, and an increasingly digital global economy. The Bitcoin boom highlighted its inherent volatility but also demonstrated its potential for high returns.   This recovery provides a valuable lesson to investors: while cryptocurrencies can experience significant drops, they also have the potential to rebound strongly, reflecting their volatile yet potentially rewarding nature.   Brandt's Current Warning and Why He's Concerned   Brandt's recent warning concerning Bitcoin signals his belief that history may repeat itself. He has noted the possibility of another 'parabolic advance' similar to the one seen before the 2018 crash. As we know, parabolic advances often precede significant market corrections. However, this time around, things are different. Bitcoin and the overall crypto market have matured significantly, with institutional acceptance, regulatory developments, and technical advancements.   Bitcoin has shown resilience despite previous market crashes and regulatory challenges, suggesting a robust underlying strength. It continues to evolve, adapting to changing market conditions and regulations and constantly improving its technology and network.   Nonetheless, Brandt's prediction serves as a reminder of Bitcoin's inherent volatility, whereas the price of Solana and other coins seems more stable. It should be seen as a word of caution for investors, reminding them to do their due diligence and consider risk management strategies when investing. The potential for high returns in Bitcoin comes with equally high risks.   Furthermore, a potential downturn in Bitcoin doesn't necessarily equate to a lack of faith in the technology behind it. Blockchain, the underlying technology of Bitcoin, has far-reaching potential beyond just cryptocurrency. It's set to revolutionize various industries, from finance and supply chain to healthcare and education, indicating a promising and enduring future regardless of Bitcoin's price volatility.   The Future of Bitcoin: A Word of Caution   While the cautionary advice of Peter Brandt carries weight, it isn't an indisputable indicator of an impending market crash. Like all financial spheres, Bitcoin's future is marked by unpredictability and uncertainties. Nevertheless, his alert serves as a pertinent reminder of the inherent risks associated with investing in cryptocurrencies.   Brandt's perspectives underscore the importance of investor education and exercising caution when dealing with Bitcoin and other cryptocurrencies. Given the potential for abrupt price swings in the market, investors are urged to conduct comprehensive research and assess their risk appetite before venturing into cryptocurrency investment.   Peter Brandt's story and his knack for accurate forecasts offer an essential lesson in prudence and rigorous examination in the unpredictable realm of crypto investing. While the potential for massive gains can be compelling, it's paramount to keep in mind the intrinsic risks tied to a market known for its swift fluctuations. As we navigate the future, Brandt's admonitions serve as a potent reminder to prospective investors: tread carefully, invest wisely, and always brace for unforeseen circumstances.

In this interview, we sit down with Paweł Majtkowski to delve into the intricate web of macroeconomic data shaping the British economy. As a seasoned economic analyst, Mr. Majtkowski provides his expert insights on the latest series of economic indicators from the UK. From GDP growth and inflation figures to employment rates and trade balances, we explore the trends, challenges, and potential opportunities that lie ahead for the UK's economic landscape. Join us as we navigate through the numbers and uncover the narratives behind the data-driven journey of the British economy.   FXMAG.COM: Let me ask you to comment on the whole series of macroeconomic data from the British economy. However, will it enter a recession? What does this data say about further potential rate hikes in the UK? The UK continues to struggle with high inflation. In June, it stood at 7.3 per cent year-on-year. The British economy is therefore experiencing difficult times, not least because of 14 consecutive interest rate rises in a row. Domestically, there is economic stagnation. However, the GDP results - 0.5 % growth last month and 0.2 % in the second quarter - are better than analysts' expectations. With such modest growth, it is the details that count. Economic activity increased in June due to very good weather (the best since 1884), there were more working days in May than in previous years and this helped to offset the effects of ongoing strike action. The services sector, which dominates UK GDP, is benefiting from low (structural) unemployment and rising wages. This, in turn, is a cause for concern for the Bank of England and especially its hawkish representatives. Further rate rises cannot therefore be ruled out. The manufacturing sector and the real estate market, on the other hand, are performing worse. Not insignificant for the UK is the fact that its second largest trading partner, Germany, has already slipped into recession. This is a result of falling manufacturing and a very slow recovery in China.   Paweł Majtkowski, eToro Market Analyst

US The main event for next week will be the Kansas City Fed’s Jackson Hole Symposium.  Fed Chair Powell’s speech will reiterate that more rate hikes might be needed and that rates should stay higher for longer.  With the recent surge with real yields, Fed Chair Powell can acknowledge that policy is restrictive and that future rate cuts could eventually be warranted as long as inflation has been defeated. The economic data starts on Tuesday with the July existing homes sales report, which should show signs of stabilizing.  Wednesday contains the flash PMIs, which could show manufacturing remains in contraction territory and softness with the service sector continues.  On Thursday, we will get both initial jobless claims and the preliminary look at durable goods, which is expected to show weakness in July. Friday contains the release of the final reading of the University of Michigan sentiment report, with most traders wanting to know if inflation expectations had any major revisions. Earnings for the week include results from Baidu, Lowe’s, Nvidia, and Snowflake,   Eurozone As the ECB is poised to continue delivering more rate hikes to combat inflation, the risks of a hard landing are growing.  There’s no shortage of economic releases next week but the one that stands out is the flash PMI readings. The manufacturing sector is clearly going to remain in contraction territory for all the key regions(Germany, France, eurozone), while the service sector steadily weakens, fighting to stay in expansion territory.  Traders will also pay attention to both the German IFO business climate report as that could show expectations might be stabilizing and what should be another soft consumer confidence report. Thin trading conditions in Europe could occur on Tuesday as some banks (France, Italy) are closed for Assumption Day.   UK Next week is mostly about the UK flash PMI survey, as the composite PMI collapse in July is expected to be followed by further weakness in August. The manufacturing PMI is expected to weaken further from 45.3 to 45.0, the service reading to drop from 51.5 to 50.8, while the composite drops from 50.8 to 50.3.   The UK economy is still expected to barely show growth in Q3, but the momentum is fading as the BOE’s rate hiking cycle starts to weigh on the economy.   Russia Following the plunge in the ruble and an emergency rate hike, the focus on Russia will shift back to the war in Ukraine and the BRICS summit.  Russia was having a growing influence in Africa, but that might get tested as President Putin will be absent given his indictment by the ICC. The economic calendar is light with two releases, industrial production data on Wednesday and money supply on Friday.   South Africa The one notable release will be the July inflation report.  Inflation is expected to stay in the SARB’s target range between 3-6%.  The annual headline reading is expected to drop from 5.4% to 4.9%, while the monthly reading rises from 0.2% to 1.0%.  The monthly core reading is also expected to see a rise from 0.4% to 0.6%.   Turkey With inflation out of control, the CBRT is expected to deliver its 3rd straight rise, bringing the 1-week report rate to 19.50%.  The consensus range is to see the rate rise from 17.5% to anywhere between 18.50% and 20.5%. The 19.0% level was a key level in the past as that triggered the sacking of Governor Agbal.   Switzerland Another quiet week with Money supply data released on Monday and export data on Tuesday.   China One sole key economic data to watch will be on Monday, the monetary policy decision on its one-year and five-year loan prime rates that commercial banks used as a benchmark to price corporate, household loans and housing mortgages respectively. After a surprise cut of 15 basis points (bps) on the one-year medium-term lending facility rate to 2.50% last Monday, its lowest level since late 2009 to defuse the potential contagion risk in China’s financial system triggered by a major trust fund that failed to make timely payments to holders of its wealth management products which are backed by unsold properties of indebted property developers; forecasts are now calling for a similar 15 bps cut on the one and five-year loan prime rates to bring it down to 3.4% and 4.05% respectively. Market participants will also be on the lookout for more detailed fiscal stimulus from China’s top policymakers after recent “morale-boosting piecemeal rhetoric measures” that have failed to break the negative feedback loop in the China stock market; the benchmark CSI 300 index has given up all its ex-post Politburo gains from 25 July after the top leadership group promised to implement “counter-cyclical” measures to defuse the deflationary risk spiral in China. For earnings report releases, a couple of major companies to take note of; Sunny Optical Technology (Tuesday), Country Garden Services (Tuesday), China Life Insurance (Thursday), NetEase (Thursday), Meituan (Friday).   India A quiet calendar with only foreign exchange reserves and fortnightly bank loan growth data out on Friday.   Australia Flash Manufacturing and Services PMIs for August will be out on Wednesday.   New Zealand Balance of Trade for July out on Monday is forecasted to shrink to a deficit of -NZ$0.4 billion from a surplus of NZ$9 million posted in June. If it turns out as expected, it will be its first trade deficit since March 2023 due to a weak external demand environment. Q2 retail sales will be out on Wednesday where its prior Q1 negative growth of -4.1% y/y is forecasted to narrow to -0.9% y/y.   Japan Two key data releases to monitor. Firstly, flash Manufacturing and Services PMIs for August out on Wednesday; manufacturing activities are forecasted to improve slightly to 49.9 from 49.6 printed in July while growth in the services sector is expected to come in almost unchanged at 53.6 versus 53.9 in July  Next up, the significant leading Tokyo area consumer inflation data for August out on Friday; both Tokyo core inflation (excluding fresh food) as well as its core-core inflation (excluding fresh food & energy) are forecasted to be unchanged at 3% y/y and 2.5% y/y respectively. Both inflation measures have remained elevated especially the core-core rate which has soared to a 31-year high. Market participants will be keeping a close watch on the USD/JPY as it rallied past a key resistance zone of 145.50/146.10 despite rising concerns on possible BoJ’s FX intervention to negate the current bout of JPY weakness.   Singapore Two key data to focus on. July’s consumer inflation out on Wednesday where the core inflation rate is expected to be almost unchanged at 4.1% y/y versus 4.2% y/y in June. On Friday, industrial production for July is forecasted to show an improvement; -2.5% y/y from -4/9% y/y printed in June. Despite this forecasted improvement, it is still ten consecutive months of negative growth which increases the risk of a recession for Singapore in Q3 due to a weak external demand environment.      

Rates Spark: A wedge between US and EUR rates 10Y UST yields have tested 4.36%, with the gap to Bunds opening further. The flash PMIs today shine a light on the contrasting macro backdrops. This is also reflected in real rates having been the driver of the US dynamic of the sell-off, while inflation expectations have played a greater role in EUR.   PMIs today shine a light on the contrasting macro backdrops Upward pressure on rates remains persistent, keeping the 10Y UST yield above 4.3%. Yesterday we also saw the gap to 10Y Bunds widening somewhat, perhaps already in anticipation of the flash PMIs released today. They are set to highlight the contrasting macro backdrops between the US and the eurozone. The eurozone PMIs are expected to show that the economy is increasingly feeling the weight of the European Central Bank’s tightened monetary policy. And that weakness could spread to the services sector, which has so far been relatively resilient while the reading for the manufacturing sector has been in contractionary territory for a year now. A decomposition of the current upward leg in rates, i.e. the rise in 10Y nominal rates since around mid-July, highlights the different narratives underlying the moves in the US and Europe. While in the US the change was mainly driven by the real component, which also reflects expectations of growth, the more moderate rise in EUR rates was largely driven by the rise of the inflation component. That is also likely to cause some headaches at the ECB as it might call into question the bank’s inflation fighting credentials. It has to be seen whether the PMIs today can extend that theme of divergence after the 10Y UST/Bund spread has now widened to 167bp already. There have also been other factors such as supply driving the wedge. For the US that theme had shifted back into focus with the Fitch downgrade of the US and increased issuance prospects, and crystallised in the weak 30Y auction two weeks ago. Tonight the sale of a new a 20Y bond still looms large. But also in the eurozone supply activities are starting to emerge from the summer lull.   Unlike in the US, the sell-off in EUR rates was driven more by inflation   Today's events and market view The main event today is the publication of the preliminary PMIs for August. For the eurozone, the consensus expect the manufacturing PMI to remain unchanged in contractionary territory at 42.7. The services sector is seen further losing momentum with the PMI declining from 50.9 to 50.5. In The US we will also see new home sales data being released. In European primary markets Germany will auction €3bn in 7Y Bunds. Finland will sell a new 5Y bond via syndication. Supranational, Sovereigns and Agencies will see the EFSF tapping a 3Y bond and sell €2bn in a  new 15Y bond. The main focus, as the US remains at the helm of the push higher in rates, will be the new US$16bn 20Y bond sold by the US Treasury tonight. Shortly before that the Treasury will also sell a 2Y floating rate note.

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.

UK order expectations decline Manufacturing and services PMIs are expected to tick lower on Wednesday The British pound started the Tuesday session in positive territory but has given up these gains. In North American trade, GBP/USD is trading at 1.2737, down 0.16%.   UK manufacturing continues to sputter The Confederation of British Industry industrial order expectations fell to -15 in August, down from -9 in July and missing the consensus estimate of -13. Output volumes for the past three months fell to -19, a huge decline from the July reading of +3. The data paints a grim picture of the manufacturing sector, and Wednesday’s manufacturing PMI is expected to point to ongoing contraction (the 50.0 line separates expansion from contraction). The August estimate stands at 45.0, compared to 45.3 in July, which was the lowest reading since May 2020. The manufacturing PMI last indicated to expansion in July 2022. The services sector has looked better and is in expansion territory. Still, there are concerns as services business activity has been slowing. The July PMI slipped to 51.5, down from 53.7 in June and the estimate for July stands at 51.0, which would indicate very little growth. The silver lining from weak activity in manufacturing and services is that it points to a cooling UK economy which could provide support for the Bank of England to ease up on interest rate hikes.   Markets eye Jackson Hole symposium Fed Chair Powell hosts the annual Jackson Hole Symposium which begins on Thursday. The Fed Chair’s speech is always a highlight, as investors will be looking for clues about the Fed’s future rate policy. Powell will be hoping not to make any waves and I expect a cautious, perhaps hawkish speech when Powell speaks on Friday. The future markets have priced in a pause at the Fed’s September meeting, but traders are divided over the November meeting and Powell’s remarks will be closely followed.     GBP/USD Technical There is support at 1.2714 and 1.2641  1.2812 and 1.2885 are the next resistance lines    

Eurozone PMI paints worrisome growth picture Another weak PMI for the eurozone confirms a sluggish economy with recession as a downside risk. Inflation pressures for services remain stubborn as wage pressures continue to be a concern. The latter adds to our expectations that the ECB's hiking cycle is not over yet.   There is very little to like about today’s PMI. In recent months, the PMI has painted a worsening picture of eurozone activity, and August data are no different. The composite PMI dropped from 48.6 to 47 with the services PMI also dropping below 50. Inflationary concerns are not over though. The manufacturing sector has been in contraction for some time, with new orders falling and backlogs of work easing. This is helping inflationary pressures subside quickly. Services activity held up for a while but is now also showing contraction, according to the survey. While goods inflation is easing on the back of lower costs and weak demand, services inflation remains elevated for now due to increased wage cost pressures – despite weakening demand. The economic picture that we're seeing is quite worrisome. Growth in the bloc was decent at 0.3% quarter-on-quarter between April and June, but strong Irish growth masked a lot of underlying weakness. While we expect tourism to have contributed positively to third-quarter growth, business surveys like the August PMI show a picture of deteriorating activity. This makes a recession a realistic downside risk to the outlook. The main concern that the European Central Bank will have with this reading is the inflationary effect of wage pressures. The economy is cooling off significantly, but hawks on the ECB board will be tempted to push for one more hike as wage pressures are translating into elevated inflation pressures for services. The fact that the selling price inflation indicator from the PMI inched up this month clearly leaves the door open to another ECB rate hike.

The EUR/USD currency pair moved upwards and downwards over the past day. Such a movement does not surprise us, as we have repeatedly mentioned that the current move to the south is fairly weak, and corrections and pullbacks occur quite frequently. So it's not surprising that the euro initially dropped and then increased.     Overall, it continues to decline, just not very rapidly or hastily. Yesterday showed us what many had realized long ago. The European economy is just shy of sliding into a recession. For several quarters, GDP indicators have been teetering on the brink of negative values. But what can one expect when the European Central Bank regularly raises its rate? It's worth noting that the GDP is going through tough times with a not-so-high key rate, especially when compared to rates in the UK and the US, where they are much higher.   While the British economy is also struggling, the American economy is growing briskly, giving the dollar a strong advantage. We will discuss business activity indices. For now, it's worth noting that the downward trend for the pair continues, but the CCI indicator went into the oversold zone yesterday. This is a strong buying signal, so we can expect a stronger upward correction soon. Especially since, on the 24-hour timeframe, we are still looking for a confident breakthrough of the Ichimoku cloud. Thus, the pair continues its correction within the global upward trend, but the main movement can resume anytime. What are the fundamental reasons for this? There aren't any. However, it's important to remember that the forex market doesn't always move strictly with fundamentals and macroeconomics.     The European economy is sliding into the abyss. The service sector in the European Union and Germany has fallen below the "waterline." If the manufacturing sector has been in the negative business activity zone for over a year, the service sector entered it in August. Now, both sectors in Germany and the EU are below the key level of 50.0, which does not bode well for the European economy. For instance, business activity indices in the US could be in better shape but still higher than in the EU or Germany.   Hence, we can only state the obvious: US statistics continue to outperform European ones. It's worth noting that the American currency has been falling for almost a year now. This happens when the Federal Reserve's rate rises faster and stronger, and the US economy appears much more stable and confident than the European one. Recognizing this fact leads us to believe that the European currency is extremely overbought and unjustifiably expensive. Based on this, we anticipate a further decline in the European Union's currency.   This week, we are awaiting the speeches by Jerome Powell and Christine Lagarde. Although we think both officials will only provide a little significant information, the market might still grasp certain hints. Both leaders hint at a pause in September; if one doesn't, it might support their country's currency. Given the sharp decline in business activity in the European Union, we believe the likelihood of "dovish" rhetoric from Christine Lagarde is much higher. But the Federal Reserve has also adopted a "two meetings – one hike" policy, so Powell is unlikely to discuss the need for immediate tightening without seeing the August inflation report.       The average volatility of the EUR/USD currency pair over the last five trading days as of August 24 is 65 points and is characterized as "average." Therefore, we anticipate the pair to move between levels 1.0809 and 1.0939 on Thursday. A downturn in the Heiken Ashi indicator will signal a resumption of the downward movement.   Nearest support levels: S1 – 1.0803 S2 – 1.0742 S3 – 1.0681   Nearest resistance levels: R1 – 1.0864 R2 – 1.0925 R3 – 1.0986     Trading recommendations: The EUR/USD pair currently maintains a downward trend. New short positions should be considered with targets at 1.0803 and 1.0742 in case of a downward reversal in the Heiken Ashi indicator or a price rebound from the moving average. Long positions can be considered if the price consolidates above the moving average, with targets at 1.0939 and 1.0986.   Explanations for illustrations: Linear regression channels – help determine the current trend. The current trend is strong if both are directed in the same direction. Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should proceed. Murray levels – target levels for movements and corrections. Volatility levels (red lines) – the probable price channel in which the pair will operate in the next 24 hours, based on current volatility indicators. The CCI indicator – its entry into the oversold area (below -250) or overbought area (above +250) indicates that a trend reversal in the opposite direction is approaching.  

Euro yawns after weak German and eurozone PMIs US to release unemployment claims and durable goods orders on Thursday The euro has edged lower on Thursday. In the European session, EUR/USD is trading at 1.0851, down 0.11%. On the data calendar, there are no releases from the eurozone. The US releases unemployment claims and durable goods orders and we could see some movement from EUR/USD in the North American session. On Friday, Germany releases Ifo Business Climate. The index has decelerated for three consecutive months and the downturn is expected to continue (87.3 in July, 86.7 expected).   Euro pares losses after dismal PMIs Eurozone and German PMIs were nothing to cheer about, as the August numbers pointed to contraction in the manufacturing and services sectors. Germany’s manufacturing sector has been particularly weak, although the Manufacturing PMI rose slightly to 39.1 in August, up from 38.8 in July and the consensus estimate of 38.1. Eurozone Manufacturing PMI climbed to 43.7 in August, higher than the July reading of 42.7 and the estimate of 42.6 points. The services sector is in better shape and has been expanding throughout 2023. That trend came to a screeching halt on Wednesday when German and Eurozone Services PMIs fell into contraction territory in August (a reading of 50.0 separates expansion from contraction). Germany dropped to 47.3, down from 52.3 in July and below the estimate of 51.5. Similarly, the eurozone slowed to 48.3, down from 50.9 and shy of the estimate of 50.5 points.   The weak PMI reports pushed the euro lower but it managed to recover without much fuss. As for the ECB, the data supports the case for a pause, as the softness in manufacturing and services is evidence that the eurozone economy is cooling down. A pause would give the ECB some time to monitor the impact of previous rate hikes are having on the economy and on inflation. Future market traders are viewing the September meeting as a coin toss between a 25 basis point hike and a pause.     EUR/USD Technical There is resistance at 1.0893 and 1.0940 EUR/USD has support at 1.0825 and 1.0778    

Euro yawns after weak German and eurozone PMIs US to release unemployment claims and durable goods orders on Thursday The euro has edged lower on Thursday. In the European session, EUR/USD is trading at 1.0851, down 0.11%. On the data calendar, there are no releases from the eurozone. The US releases unemployment claims and durable goods orders and we could see some movement from EUR/USD in the North American session. On Friday, Germany releases Ifo Business Climate. The index has decelerated for three consecutive months and the downturn is expected to continue (87.3 in July, 86.7 expected).   Euro pares losses after dismal PMIs Eurozone and German PMIs were nothing to cheer about, as the August numbers pointed to contraction in the manufacturing and services sectors. Germany’s manufacturing sector has been particularly weak, although the Manufacturing PMI rose slightly to 39.1 in August, up from 38.8 in July and the consensus estimate of 38.1. Eurozone Manufacturing PMI climbed to 43.7 in August, higher than the July reading of 42.7 and the estimate of 42.6 points. The services sector is in better shape and has been expanding throughout 2023. That trend came to a screeching halt on Wednesday when German and Eurozone Services PMIs fell into contraction territory in August (a reading of 50.0 separates expansion from contraction). Germany dropped to 47.3, down from 52.3 in July and below the estimate of 51.5. Similarly, the eurozone slowed to 48.3, down from 50.9 and shy of the estimate of 50.5 points.   The weak PMI reports pushed the euro lower but it managed to recover without much fuss. As for the ECB, the data supports the case for a pause, as the softness in manufacturing and services is evidence that the eurozone economy is cooling down. A pause would give the ECB some time to monitor the impact of previous rate hikes are having on the economy and on inflation. Future market traders are viewing the September meeting as a coin toss between a 25 basis point hike and a pause.   EUR/USD Technical There is resistance at 1.0893 and 1.0940 EUR/USD has support at 1.0825 and 1.0778    

Australian dollar slides close to 1% The Australian dollar continues to show strong volatility for a second straight day. In the North American session, AUD/USD is trading at 0.6426, down 0.84%. After a sleepy start to the week, the Aussie is showing some life. AUD/USD jumped 0.90% on Wednesday but has pared practically all of those gains today. The pair’s upswing on Wednesday was more a case of US dollar weakness than Aussie strength, as US PMIs pointed to deceleration in the manufacturing and services sectors. The US Manufacturing PMI fell to 47.0 in August, down from 47.0 in July and well below the consensus estimate of 49.3. The manufacturing sector has been unable to find its footing, with declines in ten of the last eleven months. New orders are down and weaker demand has meant a decrease in output. The services sector in the US is in better shape and posted a seventh straight month of growth in August. However, the Services PMI slowed to 51.0 in August, weaker than the July reading of 52.3 and the estimate of 52.2. Business activity in services has been falling and the August read was the lowest in six months. Consumer spending is down due to the usual suspects – high interest rates and broad-based inflation. Interestingly, business confidence improved in August, likely due to expectations that US interest rates are close to their peak. Weakness in manufacturing and services is not unique to the US, as we saw this week in PMI reports from Europe, the UK and Australia. Manufacturing and services continued to contract in Australia, as the August PMIs remained below the 50.0 level, which separates contraction from expansion. The weak PMIs are further signs of weaker economic activity, and the alarming slowdown in China will make it even more challenging for the Reserve Bank of Australia to guide the economy to a soft landing and avoid a recession.   AUD/USD Technical AUD/USD is testing support at 0.6431. Next, there is support at 0.6339 There is resistance at 0.6588 and 0.6653

The US confounded 2023 expectations that it would fall into recession as households used pandemic-era savings and their credit cards to maintain lifestyles amidst a cost-of-living crisis. But with loan delinquencies on the rise, savings being exhausted, credit access curtailed and student loan repayments restarting, financial stress will increas.   Robust resilience in the face of rate hikes At the beginning of the year, economists broadly thought the US economy would likely experience a recession as the fastest and most aggressive increase in interest rates inevitably took its toll on activity. Instead, the US has confounded expectations and is on course to see GDP growth of 3%+ in the current quarter with full-year growth likely to come in somewhere between 2% and 2.5%. What makes this even more surprising is that this has been achieved in the face of banks significantly tightening lending conditions while other major economies, such as China, are stuttering and even entering recessions, such as in the eurozone.   Consumers still happy to spend with the jobs market looking so strong So why is the US continuing to perform so strongly? Well, the robust jobs market certainly provides a strong base, even if wage growth has been tracking below the rate of inflation. Maybe that confidence in job security has encouraged households to seek to maintain their lifestyles amidst a cost-of-living crisis by running down savings accrued during the pandemic and supplementing this with credit card borrowing. The housing market was another source of concern at the start of the year, but even with mortgage rates at 20-year highs and mortgage applications having halved, prices have stabilised and are now rising again nationally. Home supply has fallen just as sharply, with those homeowners locked in at 2.5-3.5% mortgage rates reluctant to sell and give up that cheap financing when moving to a different home and renting remains so expensive. This has helped lift new home construction at a time when infrastructure projects under the umbrella of the Inflation Reduction Act are supporting non-residential construction activity.   But lending is stalling and savings have been run down The Federal Reserve admits monetary policy is now restrictive, and while it could raise interest rates further, there is no immediate pressure to do so. With inflation showing encouraging signs of slowing nicely, this is fueling talk of a soft landing for the economy. With less chance of an imminent recession, financial markets have scaled back the pricing of potential interest rate cuts in 2024, with the resiliency of the US economy prompting a growing belief that the equilibrium level of interest rates has shifted structurally higher. This resulted in longer-dated Treasury yields hitting 15-year highs earlier this month.   Outstanding commercial bank lending ($bn)   Nonetheless, the threat of a downturn has not disappeared. We estimate that around $1.3tn of the $2.2tn of pandemic-era accumulated savings has been exhausted and at the current run rate all will be gone before the end of the second quarter of 2024. At the same time, banks are increasingly reluctant to lend to the consumer with the stock of outstanding bank lending flat lining since the banking stresses in March, having increased nearly $1.5tn from late 2021. We suspect that financial stresses have seen middle and lower income households accumulate the bulk of the additional consumer debt and have run down a greater proportion of their savings vis-à-vis higher income households so a financial squeeze for the majority is likely to materialise well before the second quarter of 2024.   Rising delinquencies will accelerate as student loan repayments resume Indeed, consumer loan delinquencies are on the rise, particularly for credit card and vehicle loans with the chart below showing data up until the second quarter of this year. Since then the situation has deteriorated further based on anecdotal evidence with Macy’s CFO expressing surprise at the speed and scale of the rise in delinquencies experienced through June and July on their own branded credit card (Citibank partnered). With credit card interest rates at their highest level since 1972 and with household finances set to become more stressed with the imminent restart of student loan repayments, something is likely to give. We see the risk of a further increase in delinquencies, which will hurt banks and lead to even further retrenchment on lending, together with slower consumer spending growth and potentially even a contraction.   Percent of loans 30+ days delinquent   Downturn delayed, not averted The manufacturing sector is already struggling and we see the potential for consumer services to come under increasing pressure too. On top of this there are the lingering worries about the demand for office space and the impact this will have on commercial real estate prices in an environment where there is around $1.5tn of loans needing to be refinanced within the next 18 months. With small banks the largest holder of these loans, we fear we could see a return to banking concerns over the next 12 months. Consequently, we are in the camp believing that it's more likely that the downturn has been delayed rather than averted. Fortunately, we think inflation will continue to slow rapidly given the housing rent dynamics, falling used car prices and softening corporate pricing power and this will give the Federal Reserve the flexibility to respond swiftly to this challenging environment. We continue to forecast the Federal Reserve will not carry through with the final threatened interest rate rise and instead will switch to policy loosening from late first quarter 2024 onwards.  

US ISM reports remain consistent with GDP slowdown despite the construction boom Construction spending is performing strongly, but the ISM reports shows manufacturing has contracted for 10 consecutive months while next week's ISM services index is expected to post a headline reading consistent with the economy growing at a rate closer to 1% year-on-year rather than the 2.5% rate recorded in the second quarter.   ISM manufacturing index signals 10 months of contraction US ISM manufacturing index rose more than expected in August to stand at 47.6 versus 46.4 in July (consensus 47.0), but this is the tenth consecutive month it has come in below the break-even 50 level i.e. indicating contraction. The ISM surveys asks companies a range of questions on employment levels, orders, output, supplier delivery times and price pressures in order to come up with a broader picture of the state of the sector rather than measuring output alone such as in the industrial production report. The output index improved to 50 from 48.3, but new orders slipped back to 46.8. Prices paid moved higher to 48.4 from 42.6 but because this is below 50 it merely means that the rate of price declines are slowing rather than prices are moving higher. As such inflation pressures emanating from the manufacturing sector remain minimal and are consistent with goods consumer price inflation slowing closer to zero.     ISM reports suggest the economy is weaker than the GDP report has been signalling   Construction boom is a clear positive Meanwhile, construction spending rose 0.7% month-on-month versus the 0.5% consensus with June’s growth rate revised up to 0.6% from 0.5%. The housing market was a source of concern at the start of the year, but even with mortgage rates at 20-year highs and mortgage applications having halved, prices have stabilised and are now rising again nationally. Home supply has fallen just as sharply, with those homeowners locked in at 2.5-3.5% mortgage rates reluctant to sell and give up that cheap financing when moving to a different home and renting remains so expensive. This rise in property prices has boosted builder sentiment and lifted new home construction with residential construction rising 1.4% MoM in July after gains of 1.5% in June and 3.5% in May. Meanwhile, infrastructure projects under the umbrella of the Inflation Reduction Act are supporting non-residential construction activity, which posted the 14th consecutive monthly gain to stand 16.5% higher than 12 months ago.   Slower GDP growth ahead Construction is the stand out performer in the US right now, but next week's service sector ISM is predicted to slow to 52.4 from 52.7 and the combination of the two ISM series has historically been consistent with US GDP growth of 0-1% YoY, rather than the 2.5% the US posted in the second quarter (see chart). Just as the jobs report did earlier today, the ISM indices suggest little need for any further interest rate rises from the Federal Reserve.    

The euro has started the week with gains, after falling around 1.3% over the past two days. In the North American session, EUR/USD is trading at 1.0795, up o.19%. With US markets closed for the Labour Day holiday, we can expect an uneventful day from the euro. Will she or won’t she? ECB President Christine Lagarde has avoided giving a clear signal about the ECB rate decision on September 14th. At the Jackson Hole symposium, Lagarde said that rates would have to remain at “sufficiently restrictive levels for as long as necessary” in order to bring down inflation to the ECB’s 2% target. Eurozone inflation remained stuck at 5.3% in August, which is more than double the target. Given that disparity, one could be forgiven for assuming that Lagarde would have followed up with a heavy hint about a rate hike in September. Instead, she steered clear of the rate debate. Fast forward to today, when Lagarde delivered a speech in London. The pattern was the same – a declaration that “we will achieve a timely return” to the 2% inflation target, but no mention of the September meeting. The lack of direction from Lagarde could mean that the doves and hawks continue to push their agendas and Lagarde hasn’t decided which way to roll the dice. Inflation remains high, but the eurozone economy is not in the best shape, which means that further rate hikes could trigger a recession. On Monday, ECB Governing Council member Mario Centeno, the head of the Bank of Portugal, warned there was a risk of “doing too much” by continuing to raise rates.   The manufacturing sector in Germany and the eurozone remains mired in contraction, as last week’s PMIs indicated. The services sector has been in better shape with readings above 50.0, which indicates expansion. Still, Service PMIs have been weakening in recent months and are expected to fall into contraction territory in both Germany and the eurozone on Tuesday.  The consensus for September stands at 47.3 in Germany and 48.3 in the eurozone, which would confirm the initial estimates last month. If investors show jitters over contraction in the services sector, the weak euro could lose ground. . EUR/USD Technical There is resistance at 1.0831 and 1.0889 1.0716 and 1.0658 are providing support    

Implications for China's economy and investors' perspectives China aims to foster a virtuous circle of economic growth through technology innovation, technology application, business model innovation, productivity enhancement, economic growth, and further investment in technology. In a globalised world, this circle could be sustained even if certain critical technologies were lacking. However, in the fragmentation game that increasingly dominates the world’s order, falling behind in technology innovation could disrupt the virtuous circle and result in declining productivity, ultimately hindering economic development. Investors take this risk into account when considering investments in China, along with factors like the slower-than-expected economic recovery and various constraints. These constraints include a highly leveraged economy, particularly among local governments and the property sector, which somewhat restricts the Chinese authorities' ability to implement stimulus measures without potentially causing future financial turmoil. The extent of the impact on productivity in the Chinese internet sector, manufacturing sector and the broader economy, as well as how it will unfold, remains uncertain. Some investors positioning themselves for these changes are looking at companies capable of developing generative AI applications, manufacturing AI-related hardware, or producing AI-relevant microchips, semiconductor materials or equipment. Some Chinese companies actively sought after by investors include Baidu, 360 Security, Lenovo, Shanghai Boasight Software, Iflytek, Unisplendour, ZTE and Foxconn Industrial Internet, which are listed on the mainland and Hong Kong stock exchanges.[i] While major Chinese internet and technology companies are aware of the need to adapt their business models to potential disruptions, their generative AI products and new applications have yet to demonstrate promising prospects and significant impacts on their revenues. Baidu has shown some progress with its early focus on AI and the launch of ERNIE, an AI model capable of search, dialogue and content generation. Xiaomi continues to pursue an AI and Internet of Things development path, utilising deep learning to connect mobile and IoT devices. Tencent has developed its own AI models, including HunYuan and WeLM, facilitating text generation, dialogue, translation and gaming. Alibaba has created the Multi-Modality to Multi-Modality Multitask Mega-transformer (M6) model, while JD.COM has come up with pre-trained language models for natural language understanding and generation. Bytedance contributes a multilingual machine translation model, and NetEase offers the YuYan language model. These efforts are commendable but yet to have meaningful impact on their business models and much more needs to be done. Some of these stocks which trade at reasonable valuations based on their existing businesses may present interesting investment opportunities, but investors should take into consideration that high growth could be something of the past for these companies. As technology innovation and productivity growth hold the key to success, companies that advance in intelligent manufacturing which employs generative AI may be the next “new-new thing” to watch in China in the coming years. Investors can potentially benefit from following developments in this area. Concluding remarks China's drive towards a virtuous circle of economic growth, fuelled by technology innovation and productivity enhancement, is of utmost importance. Investors evaluating China should acknowledge the challenges posed by generative AI, while also recognising potential investment prospects in companies poised to leverage these transformative changes.

US and European equity futures markets trade higher with Asian markets also climbing on cautious optimism the Federal Reserve may decide to pause rate hikes after US core inflation advanced the least in two years. The dollar and Treasury yield both trade softer ahead of US retail sales with the euro ticking higher as traders' price in a two-third chance of a rate hike from the European Central Bank later today. Crude trades near a ten-month high on concerns about a supply shortfall, copper higher on yuan strength while gold prices have steadied following a two-day decline.   Equities: S&P 500 futures are holding up well against recent weakness trading around the 4,530 level despite yesterday’s higher-than-expected US inflation opening the door for the Fed to hike interest rates one more time in December. Arm IPO was priced at the top end of the range at $51 per share with trading set to being today. Adobe earnings after the US market close could be a key event for the AI-related cluster of stocks. FX: The US dollar wobbled on the CPI release but could not close the day higher with Treasury yields slipping. EUR in the spotlight today as ECB decision is due, and EURUSD has found support at 1.07 for now with a rate hike priced in with over 65% probability. USDJPY trades softer after government minister talked about the need for strong economic measures. Yuan strengthened further with authorities increasing bill sales in Hong Kong to soak up yuan liquidity making it more expensive to short the currency. Commodities: Brent holds above $92 and WTI near $90 after the IEA joined OPEC’s warnings of a supply shortfall in the coming months, thereby supporting a rally that started back in June when Saudi Arabia curbed supply to boost prices. Softening the rally was a weekly US stock report showing rising stocks and production near the 2020 record. Near-term the market looks overbought and in need of a pullback. Gold looking for support ahead of $1900 with a hawkish FOMC pause back on the agenda while copper trades firmer with a stronger yuan offsetting a rise in LME stocks to a two-year high Fixed income: The US yield curve bull-steepened yesterday despite higher-than-expected CPI numbers, indicating that the Federal Reserve might be approaching the end of the hiking cycle. Yet, long-term yields remained flat as the 30-year auction showed a drop in indirect demand and tailed by 1bps despite pricing at the highest yield since 2011. Overall, we remain cautious, favouring the front part of the yield curve over a long duration. Bonds will gain as the economy starts to show signs of deceleration. Still, larger coupon auction sizes and a hawkish BOJ will support long-term yields unless a tail event materializes. We still see 10-year yields rising further to test strong resistance at 4.5%. Today, the focus will be on the ECB, which markets expect to hike. Due to a recession in Germany and in Netherlands, we believe that the ECB will deliver a hawkish pause today, which might result in a short-lived bond rally. Macro: US CPI surprised to the upside, but it did not alter the markets thinking around the Fed. Core CPI rose 0.3% MoM, or +0.278% unrounded, above the prior/expected +0.2%, with core YoY printing 4.3%, down from July's 4.7%, and in line with expectations. Headline print was in line with expectations at 0.6% MoM, up from +0.2% on account of energy price increases, with YoY lifting to 3.7% from 3.2%, above the expected 3.6%. The PBoC announced plans to issue RMB15 billion Central Bank Bills in Hong Kong on September 19, which is going to tighten CNH (offshore renminbi) liquidity further In the news: Asset managers BlackRock and Amundi are warning that US recession risks are rising – full story in the FT. Germany is facing big structural problems in its manufacturing sector with gloom taking over among workers – full story in the FT. The EU is weighing tariffs against China over flooding the market with cheap electric vehicles – full story on Reuters. Technical analysis: S&P 500. Key at resistance at 4,540. Key Support at 4,340. Nasdaq 100 15,561 is key resistance. EURUSD downtrend, support at 1.0685, Expect short-term bounce to 1.08. AUDJPY testing resistance at 95.00. Crude oil uptrend stretched, expect a correction lower Macro events: ECB Main Refinancing Rate exp. unchanged at 4.25% (1215 GMT), US Retail Sales (Aug) exp. 0.1% vs 0.7% prior (1230 GMT), US Initial Jobless Claims exp. 225k vs 216k prior (1230 GMT), US PPI (Aug) exp. 0.4% vs 0.3% prior (1230 GMT), Commodities events:  EIA’s Weekly Natural Gas Storage Change (1430 GMT) Earnings events: Adobe reports FY23 Q3 earnings (ending 31 August) after the US market close with analyst expecting revenue growth of 10% y/y and EPS of $3.98 up 63% y/y. Read our earnings preview here.  

Yield pressure continues to drag on equity markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets got off to a poor start to the new quarter and the week yesterday, as higher yields and a stronger US dollar helped to keep investors on the back foot. The FTSE100 had a particularly disappointing day, slipping below last week's low to its lowest level since 13th September, with all sectors sinking into negative territory. We've seen similar price action in Asia markets which have also come under pressure with the Nikkei 225 slipping to 4-month lows, while the RBA kept rates unchanged at 4.1%. This weakness looks set to see markets in Europe continue the negative theme of yesterday and open lower.     The weekend agreement by US lawmakers to fund the government until 17th November, while kicking that problem into the long grass, has merely served to refocus investor attention on the resilience of the US economy. The agreement also shifted the odds towards another rate hike from the Federal Reserve in just under a months' time given that economic activity in the manufacturing sector appears to have bottomed out in the short term.     Yields in US treasuries, as well as UK gilts rose sharply on the day helping to act as a drag on equity markets, with the long end of the curve rising much more sharply as markets looked to price in the prospect of at least one more rate hike from both the Federal Reserve and the Bank of England, as well as the prospect that rates are likely to stay at current levels for some time to come. The rise in the US 10-year yield saw it finish at its highest level in 16 years, while the 30-year yield closed at a 13-year high, as fresh comments from various Fed officials made the case for additional rate hikes, with Fed governor Michelle Bowman remaining hawkish in comments made at a banking conference in Banff yesterday. Cleveland Fed President Loretta Mester adopted a similar view at a local business event. US markets also underwent what can only be described as a choppy session with the Nasdaq 100 managing to put in a strong session driven mainly by strong gains in the big cap giants of Nvidia, Alphabet, Microsoft and Meta Platforms, even as over half the index constituents finished the day in negative territory, while the Russell 2000 finished at a 4-month low, suggesting that for all the bullishness around the other major US indices, confidence at the small business level is slightly more fragile.     This divergence could well become even more apparent if yields as well as the US dollar continue their relentless climb, and the inversion continues to unwind in the most painful of fashions, as long term yields rise sharply.    This was a message that Fed chairman Jay Powell received loud and clear from small business leaders at a roundtable in Pennsylvania yesterday, when he was assailed from all sides over the impact that inflation, high interest rates, and labour shortages were having on their businesses, as well as other challenges facing the US economy, as interest rates reset to more normal levels.     Yesterday's ISM manufacturing survey for September appeared to show that these challenges might be abating, with prices paid slowing and hiring picking up, with this week's various jobs data hoping to reinforce this trend. Today's JOLTS report for August is expected to show that vacancy rates remained steady at 8.83m, unchanged from July as the US labour market continued to show its resilience.          EUR/USD – slipped back towards the 1.0480 lows of last week. A move below 1.0480 has the potential to retarget parity. The main resistance remains back at the 1.0740 area, which we need to get above to stabilise and minimise the risk of further weakness.       GBP/USD – slipped below the lows of last week at 1.2110 keeping the risk very much tilted towards the 1.2000 area, while below resistance at the 1.2300 area in the short term. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.         EUR/GBP – bias remains lower while below the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.     USD/JPY – bias remains for a move towards the 150.00 area, with a move above the 150.20 area targeting the potential for a move towards last year's peak at 152.00.   FTSE100 is expected to open 24 points lower at 7,486     DAX is expected to open 120 points lower at 15,127   CAC40 is expected to open 50 points lower at 7,018  

August industrial data fuels new recession risk in Germany The fourth consecutive monthly drop in industrial production is adding to fears that the entire economy has fallen back into recession in the third quarter.   Whether you call it de-industrialisation, industrial shrinking, or just a big disappointment, one thing is clear: German industrial production dropped once again in August for the fourth consecutive month. On the month, it was down by 0.2%, from -0.6% month-on-month in July. For the year, industrial production was down by 2%. Industrial production is now more than 7% below its pre-pandemic level, more than three years since the start of Covid-19. On a more positive note, production in energy-intensive sectors increased by almost 1% MoM in August and is now ‘only’ 8% down over the year. Activity in the construction sector fell by 2.4% MoM.   Recession risk uncomfortably high Looking ahead, stabilising but still weak production expectations, thin order books despite last week’s increase, and high inventories all indicate that German industrial production will continue moving sideways rather than gaining momentum anytime soon. Today’s industrial production data will do little to change the current hangover mood in the German economy. A stagnating economy in the second quarter after two quarters of contraction gave hope to some that the economy was improving. However, hard data for July and August had nothing to be cheerful about. In fact, retail sales, exports and industrial production all disappointed in the first two months of the third quarter, suggesting that for the entire economy, the risk of falling back into contraction is uncomfortably high.

Polish manufacturing bottoming out and producer prices starting to stabilise Industrial production fell 3.1% YoY in September, but there are early positive signs as seasonally adjusted data points to a turnaround. Producer prices (PPI) also started stabilising, but deflation in YoY terms is there to stay for some time   Industrial production fell by 3.1% YoY in September (ING: -3.8%; consensus: -3.0%) with a further deepening of the decline in manufacturing (-3.7% YoY vs. -2.0% in August), though it is worth remembering that September this year had one working day less than in September 2022, what deducted ca 3pp from production in YoY terms. There are, however, some encouraging signs as seasonally adjusted data points to a 0.9%MoM increase in output. It was the second consecutive month of rising activity growth in seasonally adjusted terms.   Industrial ouput bottoming out Industrial production, 2015=100, SA Large annual declines in production were recorded in export-oriented industries: metals (-15.7% YoY), electrical equipment (-15.0% YoY), and electronic and optical products (-10.4% YoY). At the same time, increases were recorded in areas related to investment and energy. Production in the “repair and installation of machinery and equipment” increased by 7.3% YoY. Growth was also observed in the “electricity, gas, steam and air conditioning supply” (+3.7% YoY). This suggests that we should see continued expansion of investment and further deepening of the decline in exports in the composition of 3Q23 GDP.     Economy reached a bottom and should slowly recover Although the headline production indicator on an annual base still looks dismal, the seasonally adjusted data suggests that industry has most likely found the bottom and has started to rebound. Business surveys suggest that the decline in orders is slowing down, which should support a gradual stabilisation and then a bounce back in activity in the coming months.   Producer prices stabilise but the recent decline is yet to pass to consumer prices Producer prices (PPI) fell by 2.8% YoY in September (ING: -3.4%; consensus: -2.7%), following a 2.9% YoY decline in August (data revised). On an annual basis, we still have deflation, but the price level is beginning to stabilise. The MoM decline in prices over the past two months has stalled. Despite strong reductions in wholesale fuel prices, the magnitude of the price decline in the 'coke and refined petroleum products production' category turned out shallower than expected   PPI deflation continues, but price level ceased to decline PPI inflation, %YoY  

German industrial production disappoints once again Another disappointing data release not only suggests that third-quarter GDP growth could be revised downwards, but also that the country is likely to end the year in a technical recession. Germany’s macro horror show continues, and we are almost getting to the point where kids ask their parents where they were the last time Germany produced a series of positive macro data. Today’s industrial production data is unfortunately no exception to the longer-lasting trend. German industrial production dropped once again in September for the fifth consecutive month. On the month, it was down by 1.4% from -0.1% month-on-month in August. For the year, industrial production was down by 3.7%. The drop in industrial activity was spread across all main sectors. 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 was more than 8% down compared with September last year.   Risk of ending the year in technical recession remains high Looking ahead, leading indicators in October don't bode well for future production. After a first stabilisation in September, production expectations and survey-based order book assessments weakened again in October. Inventories have started to come down somewhat but remain too high. Yesterday’s industrial orders data for September confirmed the weak outlook. It all looks as if German industrial production will continue moving sideways rather than gaining momentum anytime soon. With today’s data, industrial production would have to increase by at least 2% MoM in the coming months to bring production back into positive territory in the fourth quarter. Even though there isn’t any hard data for the fourth quarter yet, recent developments have clearly increased the risk that the German economy will end the year in recession.

Hungarian industry runs on exports alone Although September brought some recovery in Hungarian industry, domestic demand is still limiting the overall performance. The silver lining is that the third quarter was good enough to take Hungary out of technical recession. Industry surprised on the upside in September, with output rising by 1.2% month-on-month, according to the latest release from the Hungarian Central Statistical Office. This also means that, contrary to the expected deterioration, the year-on-year index for the working day adjusted indicator improved in September compared with August. Although the change in September can be seen as a positive development, the overall picture remains unimpressive, with production levels failing to reach the levels seen in July. Moreover, the level of industrial production is still hovering around the levels seen after the recovery from the Covid crisis.   Volume of industrial production   With the September data, we now have the performance for the third quarter as a whole as well. Our estimates show that industry grew by around 1.7% on a quarterly basis, meaning that the sector could have made a positive contribution to GDP growth in the third quarter. This raises the possibility that, after four quarters, we may see a positive quarter-on-quarter change in GDP, i.e. an end to the technical recession in Hungary.   Production level and quarterly performance of industry   Detailed data is yet to be released, but according to preliminary data from the Hungarian Central Statistical Office (KSH), there were no significant changes in the structure of industrial production. While the majority of sub-sectors contributed to the decline in output, the exceptions remain the manufacture of EV batteries and the car industry. The improved performance in September was thus due to export sectors returning to full capacity after the summer shutdowns. Moreover, the data suggests that the technical problem experienced by Volkswagen at the end of September did not lead to a production shortfall that would have dragged down the industry's performance.   Performance of Hungarian industry   In our view, as long as there is no lasting change in the economic environment, industrial production will hover around the levels of 2021-2022. This also means that we can expect industrial production to contract by around 5% for the year as a whole. In terms of risks regarding the outlook, there have been no significant changes over the past month. The clouds are gathering on the external demand side, i.e. on the side of the export-producing sectors, as European industrial performance continues to struggle to find its footing, while growth in China is still weak, which is hardly helping a recovery in world trade. Over the past two months, new orders in the manufacturing sector have contracted, and order books have also weakened. While the level of total orders in June was 10.6% higher on a yearly basis, we see the possibility of it falling into negative territory in September due to the high base. Turning to domestic factors, there are still no signs of a rapid pick-up in output growth in domestic demand (consumption and investment) in the short term.   Factors limiting production in Hungarian industry (% of respondents)   Looking at the end of this year and the outlook for 2024, there are some positives. Industrial companies will be able to renegotiate their energy contracts this winter at a much more favourable market price. This could lead to a significant reduction in their costs, which in turn could lead to a pick-up in production in sectors that are currently underperforming due to sunk costs (mostly sectors driven by domestic demand). This could also be helped by the fact that, as inflation moderates and household purchasing power recovers from the end of the year onwards, industrial sectors producing for the domestic market could receive some positive impetus not only from the supply side but also from the demand side, which could offset the initial weakening of industrial exports.    

Singapore: Industrial production rebounds for its first gain in more than a year Singapore industrial production jumped 7.4%YoY, much better than expectations for a contraction.   October industrial production up 7.4% Singapore’s string of positive data continues, this time with industrial production beating market consensus to rise 7.4% YoY.  Market expectations tipped production to slow for a 13th straight month.  Compared to the previous month, industrial production jumped 9.8%, much better than expectations for a 0.4% contraction. Electronics picked up to 14.8% YoY, from 12.7% in the previous month. Biomedical and general manufacturing rose 5.1% YoY and 4.3% YoY, respectively.  Chemicals remained in contraction (1.0% YoY) but at a less pronounced pace compared than the 13.0% YoY drop of the previous month.   Industrial production bounces back sharply, tracking NODX   Better IP data today a sign of things to come? Industrial production had been mired in an extended slump (13 months), tracking the struggles of the export sector.  With global demand relatively subdued of late, soft non-oil domestic oil (NODX )orders filtered through to the industrial output numbers.  The improvement in the October NODX report signaled a potential recovery for the industrial sector and we could see this sector string together a decent streak of expansion now that global demand appears to be showing signs of a potential recovery.  Today's industrial production report should contribute well to 4Q GDP numbers which will continue to get a boost from leisure related services. 2023 full year GDP growth of 1% YoY is well within reach.     

Eurozone inflation falls to 2.4% US ISM Manufacturing PMI expected to improve to 47.6 Fed Chair Powell will deliver remarks in Atlanta The euro is showing limited movement on Friday. In the European session, EUR/USD is trading at 1.0897, up 0.09%. Eurozone inflation falls more than expected Eurozone inflation has been falling and the November report brought good tidings. Headline inflation ease to 2.4% y/y, down from 2.9% in October and below the market consensus of 2.7%. A sharp drop in energy prices was a key driver in the significant decline. Core inflation, which is running higher than the headline figure, dropped to 3.6%, down from  4.2% in October and below the market consensus of 3.9%. The soft inflation report sent EUR/USD lower by 0.74% on Thursday, but ECB policy makers are no doubt pleased by the release, as it indicates that the central bank’s aggressive tightening continues to curb inflation. Headline CPI has dropped to its lowest level since July 2021 and is closing in on the 2% inflation target. Still, core CPI, which excludes food and energy and is a better gauge of inflation trends, will need to come down significantly before the ECB can claim that the battle against inflation is over. The ECB has signalled a ‘higher-for-longer policy’, and hasn’t given any indications that it plans to cut rates anytime soon. This has resulted in a significant disconnect with the financial markets, as traders believe that the ECB will have to respond to falling inflation and weak growth by trimming rates. The markets have brought forward expectations of a rate cut to April due to the soft inflation report. Just one month ago, the markets had priced in an initial rate cut in July. It will be interesting to see if ECB President Lagarde clings to the higher-for-longer stance or will she acknowledge the possibility of rate cuts in 2024. The US wraps up the week with the ISM Manufacturing PMI. The manufacturing sector has been in a prolonged slump and the PMI has indicated contraction for twelve consecutive months. The PMI is expected to improve to 47.6 in November, compared to 46.7 in October. A reading below 50 indicates contraction.   Investors will be listening closely to Jerome Powell’s remarks today, looking for hints about upcoming rate decisions. Powell has stuck to his script of a ‘higher for longer’ rate policy, but the markets have priced in a rate cut in May at 84%. . EUR/USD Technical There is resistance at 1.0920 and 1.0986 1.0873 and 1.0807 are the next support levels

German business confidence weaker than expected The euro has started the week in positive territory on Monday. In the European session, EUR/USD is trading at 1.0914, up 0.18%. It was a week of sharp swings for the euro, which posted strong gains during the week but reversed directions on Friday and declined 0.88%. Still, the euro posted a winning week, rising 1.2% against the US dollar. German business confidence dips Germany’s Ifo Business Climate was softer than expected, dropping to 86.4 in December. This was down from a revised 87.2 in November and missed the market consensus of 87.8. Business conditions and business expectations also eased in December and were shy of the forecast, as companies remain pessimistic about the German economy. The lack of confidence mirrors the prolonged weakness in the German economy. December PMIs indicated contraction in both the services and manufacturing sectors. Germany, the largest economy in the eurozone, also reported a decline, with the PMI falling to 48.4, down from 49.6 in November and short of the consensus estimate of 49.8. The servicaes industry has contracted for five straight months while manufacturing has been mired in contraction since June 2022. ECB stays hawkish The European Central Bank held the benchmark rate at 4.0% for a second straight time on Thursday. This move was expected but the central bank pushed back against market expectations for interest rate cuts next year, sending the euro soaring over 1% against the US dollar after the announcement. There is a deep disconnect between the markets and the ECB with regard to rate policy. The ECB remains hawkish and Reuters reported on Friday that ECB governors are unlikely to cut rates before June. The markets are marching to a very different tune and have priced in at least in around six rate cuts in 2024, with the initial cut expected around March. Lagarde has insisted that the central bank’s decisions will be data-dependent rather than time-dependent and she may have to join the rate-cut bandwagon if inflation continues to fall at a brisk pace. . EUR/USD Technical EUR/USD is putting pressure on resistance at 1.0929. Above, there is resistance at 1.0970 1.0855 and 1.0814 are providing support        

Chicago PMI expected to decelerate China releases PMIs on Saturday The New Zealand dollar is in negative territory on Friday. In the European session, NZD/USD is trading at 0.6308, down 0.37%. The US dollar has hit a rough patch lately and retreated against most of the majors. The New Zealand dollar has been full marks, climbing some 400 basis points over the past five weeks. The Federal Reserve meeting earlier this month has boosted risk appetite, as Fed Chair Powell jumped on the rate-cut bandwagon, signalling that the Fed is finally done raising interest rates. Powell pencilled in three rate cuts next year while the markets have priced in double that. Fed members have urged caution, but the markets remain exuberant and have priced in an initial rate cut in March. Inflation is getting closer to the 2% target and with the labour market in good shape, it looks like the Fed could guide the US economy to a soft landing and avoid a recession. Chinese PMIs next New Zealand doesn’t release any tier-1 events until mid-January, but Chinese PMIs, which will be released on Saturday, could have an impact on the direction of the New Zealand dollar. China is New Zealand’s largest export market and the PMIs will provide a report card on the health of China’s service and manufacturing sectors. China’s recovery has been patchy and the slowdown has resulted in deflation in the world’s number two economy. The manufacturing sector has been stuck in contraction for most of this year and non-manufacturing expansion has been steadily falling and has stagnated over the past two months. The Manufacturing PMI is expected at 49.5 and the Services PMI at 50.3.   The US releases Chicago PMI, an important business barometer, later today. The PMI shocked in November with a reading of 55.8, which marked the first expansion after fourteen straight months of contraction. The upward spike may have been a one-time occurrence due to the end of the United Auto Workers strike as activity rose in the auto manufacturing industry. The consensus estimate for December stands at 51.0, which would point to weak expansion. . NZD/USD Technical NZD/USD tested resistance at 0.6345 in the Asian session but has reversed directions. Below, there is support at 0.6031 There is resistance at 0.6150 and 0.6195

COT reports on the British pound show that the sentiment of commercial traders has been changing quite frequently in recent months. The red and green lines, representing the net positions of commercial and non-commercial traders, often intersect and, in most cases, are not far from the zero mark. According to the latest report on the British pound, the non-commercial group closed 10,000 buy contracts and 4,200 short ones. As a result, the net position of non-commercial traders decreased by 5,800 contracts in a week. Since bulls currently don't have the advantage, we believe that the pound will not be able to sustain the upward movement for long . The fundamental backdrop still does not provide a basis for long-term purchases on the pound.   The non-commercial group currently has a total of 58,800 buy contracts and 44,700 sell contracts. Since the COT reports cannot make an accurate forecast of the market's behavior right now, and the fundamentals are practically the same for both currencies, we can only assess the technical picture and economic reports. The technical analysis suggests that we can expect a strong decline, and the economic reports have also been significantly stronger in the United States for quite some time now.   On the 1H chart, GBP/USD is making every effort to correct lower, but the uptrend remains intact. We believe that the British pound doesn't have any good reason to strengthen in the long-term. Therefore, at the very least, we expect the pair to return to the level of 1.2513. However, there are currently no sell signals, so the uptrend is still intact. On Tuesday, there are few reasons for the pair to show volatile movements. We may see a flat phase, a downtrend, or an uptrend (intraday), so we need to purely rely on technical analysis. We expect the pound to consolidate below the trendline, and in that case, we can consider selling while aiming for the Senkou Span B line. A n upward movement is theoretically possible today, but we see no reason for it, so you shouldn't consider buying at the moment. As of January 2, we highlight the following important levels: 1.2215, 1.2269, 1.2349, 1.2429-1.2445, 1.2513, 1.2605-1.2620, 1.2726, 1.2786, 1.2863, 1.2981-1.2987. The Senkou Span B line (1.2646) and the Kijun-sen (1.2753) lines can also be sources of signals. Don't forget to set a breakeven Stop Loss to breakeven if the price has moved in the intended direction by 20 pips. The Ichimoku indicator lines may move during the day, so this should be taken into account when determining trading signals. Today, the UK and the US will release their second estimates of business activity indices in the manufacturing sector for December. These are not significant reports so it is unlikely for traders to react to them. Description of the chart: Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals; The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals; Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals; Yellow lines are trend lines, trend channels, and any other technical patterns; Indicator 1 on the COT charts is the net position size for each category of traders; Indicator 2 on the COT charts is the net position size for the Non-commercial group.