Weak PMI’s and soft central bank communication

Jens Peter Sørensen Danske Bank A/S

Market movers today

A busy day ahead of us as we have PMI's for the US, euro area, Japan and Germany plus central bank events. We expect PMI's in all countries to deteriorate from their current levels on the back of the slowing global growth and geopolitical risks. In the US, we expect PMI manufacturing to drop below the 50 mark. That said, our forecast was made before the release of the strong regional PMIs last week, which means there are upside risks to our estimate. In the euro area we expect the manufacturing PMI to decline from the already 6.5 year low level of 46.5 to 46.2 driven by the still very fragile German manufacturing sector.
On global monetary policy, we have ECB July meeting minutes as well of a lot of monetary policy discussions from the Fed's Jackson Hole conference. The theme is "Challenges for Monetary Policy", which suggests it will focus on the same things as in the FOMC review of the current monetary policy framework. The ECB minutes will be scrutinised for any news regarding new policy measures.
In the Nordics, we get Swedish unemployment figures and Norwegian Oil investment survey.
UK Prime Minister Boris Johnson meets with French President Emmanuel Macron after his visit to Germany yesterday. EU has continuously rejected PM Johnson's call for a removal of the backstop of the withdrawal agreement.

Selected market news

As expected, there was not much news in the FOMC minutes released last night. The minutes revealed that while the committee was much divided, the initial cut should be seen as a mid-cycle adjustment and not the start of an aggressive easing cycle. Also, the Fed stressed it wanted flexibility/optionality and that monetary policy was not on a pre-set course. All in line with Fed chair Powell's message at the press conference that left market participants a bit disappointed. We want to emphasise that one should not put too much weight on the minutes given that much has happened since the meeting. The trade war has escalated further and we no longer expect a trade deal on this side of the US presidential election. The economic indicators from Europe and China have been weaker than anticipated. The US 2s10s yield spread inverted briefly last week and inflation expectations have dropped further. Hence we still expect the Fed to deliver more cuts.

The reaction in the Asian equity markets this morning has been modestly negative as the FOMC minutes did not bring much news to change the view on the Fed as discussed above. President Trump kept up his attack on the Federal Reserve for not delivering more on monetary policy. Hence, there will be significant focus on the speech by Fed President Powell on Friday.

In the EU, the Brexit talks continue although it looks difficult to reach a new agreement.

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Author

Jens Peter Sørensen

Danske Bank A/S

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