The Euro area economy is bottoming out but it’s happening at a snail’s pace

Markets

The slight US Treasury underperformance vs Bunds throughout the day yesterday deepened in the wake of some Fed policymakers hitting the wires after last week’s meeting. Fed’s Hammack and Bostic, both non-voters this year, and Musalem (voter) are all worried about inflation, which has been and still is too high for a long time. Bostic and Musalem supported the September rate cut but warned the room for further easing is limited (without policy becoming overly accommodative). Hammack prior to that meeting said she saw no case for lowering interest rates with inflation too high and the labour market “still in a pretty good shape”.  The Fed should be very cautious in removing policy restriction, the Cleveland Fed president noted. Miran repeated his call for jumbo cuts this year to 3%-3.25% and added that’s he’ll likely continue to dissent at future Fed meetings. Such comments make him a man to ignore from a market point of view. The US yield curve bear flattened with net daily changes varying between +1.9 bps (30-yr) to 3.2 bps (2-yr). German rates traded within a 2.5 bps trading range to end the day basically flat, the exception being the 30-yr (+2 bps). Interest differentials widened in favour of the USD but it were the technicals that dominated EUR/USD. The pair bounced off a short-term upward sloping trendline (originating in August) to end around the 1.18 big figure. EUR/GBP followed higher in EUR/USD’s slipstream and closes  in on the July high (0.8769). Gold rallied to a new record high ($3746/ounce) like a two-staged-rocket while oil prices dropped for a fourth day straight ($66.57/b). Wall Street keeps hitting records, although the one yesterday was driven by the usual (tech) suspects.

 The economic calendar churns out September  PMI business confidence indicators today. It started with Australia and India this morning (see below), heads into the euro area and the UK before arriving in the US. Japan is scheduled  for release tomorrow due to a national holiday. The euro area economy is bottoming out but it’s happening at a snail’s pace. That’s the main message coming from the PMIs for the last couple of months now and we don’t expect a major acceleration having taken place last month. Consensus expects readings similar to August: 51.1 for the composite with both manufacturing (50.7) and services (50.5) growing marginally. US PMIs are usually of second tier importance (compared to the ISMs) but nevertheless worth following up. We’ve seen US yields correcting higher in the wake of the Fed’s very dispersed dot plot. It lacked clear, unambiguous guidance for future moves lower while markets were positioned as such. Given the wide views at the Fed, (money) markets are vulnerable for economic data in both directions. Upside surprises strengthen calls from the likes mentioned above and vice versa. For the US dollar to lose support at EUR/USD 1.1919 (September multiyear high) the US PMIs would probably have to deliver a major miss though. Fed chair Powell later vents views on the economy but they shouldn’t differ much from the ones set out last week.

News and Views

Australia and India kicked off September global PMI releases this morning. Australian business activity growth slowed with the composite PMI falling back from a multi-year high of 55.5 in August to 52.1. The weaker expansion of output was driven by a slower rise in incoming new orders (even drop in goods new orders), attributed partly to a renewed fall in export orders. Business optimism also fell to the lowest level in a year. That said, firms continued to hire at a solid pace to cope with ongoing workloads and to clear existing orders. Average input costs continued to increase at an above-average pace while selling price inflation eased slightly. Indian private sector growth cooled as well in September. The composite PMI came off a multi-year high as well but still points at a sharp rate of expansion (63.2 from 61.9). A softer expansion in new business intakes accompanied slower increases in private sector output and employment, with international sales also rising at a weaker pace. The impact of higher US tariffs (50%) on India was partly offset by stronger domestic order growth backed by lower tax rates. Prices trends were more benign as cooler input cost inflation allowed for selling charges to be lifted to a lesser degree. Nevertheless, business confidence strengthened at the end of the second fiscal quarter.

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