sluggish economy

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.

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