Key news

  • China HSBC PMI rises to highest level in three months and house prices in China show strongest gain in a year.

  • Stock markets losing steam ahead of central bank meetings despite stronger US data.

  • Focus today on Fed meeting but little action is expected for now. We forecast a small rebound in ISM manufacturing.


Markets Overnight

Overnight China released both HSBC PMI and NBS PMI. HSCB PMI rose to the highest level in three months to 49.3 in July from 48.2 (no consensus estimate). The new orders index rebounded to 48.7 from 47.2. While still below 50 it shows tentative signs of recovery in the Chinese economy and we continue to look for rising growth in coming quarters on the back of monetary and fiscal stimulus. PMI from the National Bureau of Statistics was slightly softer than expected at 50.1 (consensus 50.5) from 50.2 but overall also points to stabilisation. On another positive note, China home prices posted the strongest gain in more than a year according to SouFun Holdings Ltd, the country’s biggest real estate website owner.

Chinese stock markets reacted positively to the data with the Shenzen Composite up 1.6% this morning.

We are closing in on the highlight this week - the ECB meeting tomorrow. The market expects the ECB to take forceful action aimed at fighting the euro crisis but reports over the past few days suggest that Thursday may be too early for any big action from ECB. This has triggered some setback in the stock markets. S&P500 shed 0.4% yesterday and the future is marginally down in Asian trading.

The losses came despite stronger-than-expected US data yesterday with Chicago PMI rising to 53.7 in July from 52.9 and consumer confidence up to 65.9 in the same month from 62.7. Case-Shiller house prices also showed strength rising 0.9% m/m in May. There are thus signs that the US economy is recovering slightly following the spring slowdown.

US bond yields traded slightly lower yesterday but have been unchanged overnight with the 10-year yield trading at 1.48%. In Europe the Spanish 10-year yield rose 15bp in the afternoon to 6.71%. In contrast the German 10-year yield fell more than 10bp to 1.29%.

In the FX markets EUR/USD lost slightly overnight while USD/JPY was pushed to the lowest level since early June. Scandi crosses have been broadly stable.