US ISM Services PMI in focus

In focus today

Today, the US ISM services PMI is due, with consensus expecting an increase to 51.5 in July from 50.8 in June. The preliminary services PMI for July surprised to the upside, rising to 55.2 from 52.9, supported by strong domestic service demand holding up well. However, recent growth has been overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year.

Economic and market news

What happened overnight

In China, S&P services PMI rose to 52.6 in July, up from 50.6 in June, marking the fastest expansion in 14 months. The rebound reflects stronger domestic demand and increased activity in export-related services, helping to offset ongoing weakness in manufacturing and underpinning the broader economic recovery. 

What happened over yesterday

In the euro area, the August Sentix indicator dropped sharply to -3.7, well below expectations of 8.0. As the first indicator reflecting investors' initial assessment of the EU-US tariff deal, it offered a view of the sentiment in the euro area. The data revealed worsening perceptions of both the current economic situation and future expectations for the euro area.

Equities: Equities delivered a surprisingly strong comeback yesterday, reversing most of Friday's losses. While this reaction aligns broadly with what we discussed in Monday's Morning Espresso, it still surprises us slightly that the market so decisively ignored the underlying signal from Friday's notably weak non-farm payrolls report. In other words, equity markets are showing little concern at this point about the potential softening in the US labour market.

Digging deeper into equities, the rally was led by cyclicals and small caps, underlining a clear "risk-on" tone in yesterday's session. One might be tempted to label this a classic Goldilocks move, though we lean more toward the view that we are seeing a degree of exuberance in equities at present.

In the US yesterday, Dow +1.3%, S&P 500 +1.5%, Nasdaq +1.9%, Russell 2000 +2.1%.

Asian equities are broadly higher this morning, and futures in both Europe and the US point to a stronger open.

FI and FX: There was a significant decline in European government bond yields yesterday and the spread between the core-EU and periphery tightened, where the 10Y Italian-German yield spread is once again touching 80bp. The US bond market could not follow the trend from Friday and yields just dipped a few bp ahead of the sale of 3Y, 10Y and 30Y government bonds during the week. There were modest movements in US Treasuries in Asian trading hours this morning.