Market Movers
• Today, final euro area manufacturing PMI figures will be released. Focus will be on the first release of the Italian and Spanish figures. In both countries, the manufacturing PMIs should remain around the current relatively high levels, implying the PMIs in the periphery countries in July should be better than the average euro area figures, which weakened in July due to a disappointing French figure. In the UK, we expect the manufacturing PMI to increase slightly.
• In the US we expect ISM manufacturing to decline to 53.1 in July from 53.5 in June. Regional PMIs generally suggest a lower reading and the order-inventory balance also indicates the ISM index could worsen a bit. Looking further ahead, we continue to expect a moderate pick up in ISM manufacturing in H2 as the manufacturing sector should benefit from an overall strengthening of demand
• Focus will also be on US core PCE inflation as this is the Fed’s preferred measure of inflation. Core CPI inflation for June has already been released and prices rose by 0.2% m/m, lifting the annual rate slightly to 1.8% from 1.7%. However, core PCE inflation is lower and we expect it to remain unchanged at 1.2% y/y with a monthly increase of 0.2%.
• The main release during the rest of the week is the US labour market report for July, out on Friday. This is one of the important releases ahead of the Fed meeting in September, at which we expect a first 25bp rate hike.
• In Sweden we expect the July manufacturing PMI to bounce, see more on page 2.
Selected Market News
On Friday the US Employment Cost Index figure for Q2 was much weaker than expected and resulted in lower US treasury yields, especially in the short end of the curve, and a sharp decline in the USD. However, the headline figure was worse than the details as the weak print was mainly driven by two of the service sectors (information and professional services). The weak headline figure does not support our call for a hike in rates in September, but the FOMC will receive further information about the labour market ahead of the meeting. We stick to our call of a first hike in September, although it is dependent on incoming data.
This morning the final Chinese Caixin manufacturing PMI for July (formerly HSBC PMI) was revised down to 47.8 from 48.2 in the flash estimate. This is the lowest level in two years and suggests that China is suffering from the real appreciation of the CNY and that the economy is feeling a stronger headwind than expected from the recent equity market turmoil.
Stock markets in Asia are mostly lower on the back of the downward revision to the Chinese manufacturing PMI. The oil price has also moved lower with Brent crude trading below USD52/bbl for the first time since January.
Scandi Markets
We expect Swedish July manufacturing PMI to bounce back after two months of decline. That said, unless it is well above 55, it should just be a correction in what appears to be a downward trend.
Fixed Income Markets
Net cash flow is an estimated EUR 23.2bn positive for the EUR government bond market this week, as Italy will see coupons and redemptions of EUR 31.3bn and as Austria, Germany, France and Spain are coming to the market. Note though that the EGB auction calendar is empty today. We like to be long Spain versus Italy in the 15Y segment after the recent underperformance. For more info see Government Bonds Weekly,.31 July 2015.
Today, the EGB market will keep an eye on the re-opening of the Greek financial markets as the negotiations continue in Greece between the Greek government and representatives of the IMF, ECB, EU and the ESM.
US Treasury yields were pushed lower on Friday as the US Employment Cost Index was weaker than expected. With the weak Chinese PMI out this morning and Brent oil below USD52 a barrel, bunds should start the week with fundamental support.
FX Markets
The USD fell like a stone on Friday on the back of the very weak US Employment Cost Index (ECI) number at 0.2% (0.6% consensus), which was significantly lower than the 0.7% printed in Q1. However, the headline number was weaker than the details as the weak overall number was primarily driven by a sharp drop in two of the service sectors. Still, the ECI was a shockingly weak number which naturally weighed on the USD, particularly versus reserve currencies such as the EUR where long USD positioning is heavy. However, we expect any rally in commodity/EM currencies vs USD to be short-lived as downward pressure remains on commodities and a weaker US economy does not help in this regard. In particular, the upward pressure on USD/RUB is likely to continue following the 50bps rate cut to 11% by the Central Bank of Russia on Friday.
This week, we will have a string of important US data starting with PCE core, personal spending and ISM Manufacturing today and ending with non-farm payrolls on Friday. We expect the US data to be either in line with consensus or slightly weaker, which could weaken the USD further particularly against the EUR and JPY. In the Scandies, the downward pressure on EUR/SEK following the stronger than expected GDP data was short-lived as the Riksbank focuses on inflation not growth. We think the range in EUR/SEK has moved up to 9.30-9.50 from 9.20-9.40 with the threat of further Riksbank action protecting the downside.
