August global PMI surveys offer some distraction today

KBC Market Research Desk KBC Bank

Markets

The US Treasury curve bear steepened yesterday, with yields rising by 2.5 bps (2-yr) to 5.7 bps (30-yr). The move almost fully reversed the temporary relief by the US Treasury’s announcement to upscale liquidity providing buyback operations at longer tenors. They immediately met with criticism both because of their limited scale and by exposing the US Treasury (Secretary) as being nervous about the absolute levels of long term yields. It’s in markets nature to eventually find out how big Bessent’s resolve is. Yesterday, he tried to soothe worries by stressing that the administration had a big toolkit to get bond yields down. In his opinion, they don’t trade in line with fundamentals with a quiet period in a thin market amplifying moves. He also touched on the heart of the matter, deteriorating public finances: “we are announcing probably at the end of this week, beginning of next week, an increased focus on fiscal consolidation.” It didn’t help for yesterday’s intraday action that energy prices got a new boost as US President Trump prepares for economic D-Day against Iran. On Monday, Bessent is scheduled to detail specific measures of “the greatest coordinated economic isolation in the history of the world”. The plan targets not only Iran but also its trading partners. Markets are again misinterpreting the situation according to Bessent, who says that economic pressure isn’t necessarily bullish for crude. In the meantime, Brent crude did rally to the high $94/b area for the first time in a month. European gas prices (Dutch TTF) hit €65/MWh for the first time since mid-March. Low European gas storage levels are expected to keep prices elevated during injection season. German gas storage for example is 50% full (EU average of 61%), well below the 5-yr seasonal average of 76% this time of the year. It prompted the Economy Ministry to lower its November 1st official target of 70% to the range of 60% to 70%.

Yesterday’s bond sell-off wasn’t exclusive to the US. It also impacted other assets with risk sentiment on stock markets dwindling. Key US indices lost 0.9% to 1.3%. The Dow Jones underperformed after Walmart announced sales growth slowing to a 6-yr low. US assets suffer in general as markets return to some kind of debasement trade. EUR/USD moved above 1.17 for the first time since mid-May. Crypto markets are staging a comeback while the tables for gold are turning for the better as well. August global PMI surveys offer some distraction today, but they’re probably unable to take the focus off dynamics at the long end of global yield curves and potential spill-over effects to risk sentiment.

News and views

Japanese inflation in July quickened bang in line with expectations. The headline figure rose to 1.9% from 1.6% while the Bank of Japan’s preferred underlying gauge (ex. fresh food) accelerated to 1.8% from 1.6%, the fastest pace since January. Bare in mind that government subsidies for electricity, gas and gasoline artificially subdue price pressures. Classic core CPI (ex. food and energy) rebounded to 1.9% from 1.7%. Other indicators, such as services inflation at 1.2% - slightly higher than in June – are also suggestive of the underlying momentum holding on. The Bank of Japan had said earlier that it expects CPI to rise “clearly above” the 2% target from the second half of this fiscal year (that runs through March 2027). With inflation having accelerated for a second month straight, the numbers today seem to back that. Japanese money markets slightly upped bets for a rate hike at the September to 82% with pricing currently going as far as two more moves (to 1.75%) over 2027. The Japanese yen is unbothered by the print. USD/JPY steadies around yesterday’s close near 159.

The Panama Canal authority said it will begin limiting daily slots from September 4 to 34 per day. A further reduction to 32 per day follows September 15. It is a direct effect of the water shortages caused by El Nino. Rainfall from May to August has been more than a third lower than the historical average. With this El Nino forecasted as being a severe one, the authority also warned for water availability during the upcoming dry season, witch stretches from January through April. The decision comes after traffic through the canal is already surging because of a global rerouting of containers as the Hormuz Strait remains closed. Average auction prices for slots on the Canal have already more than doubled, raising shipping costs even further.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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