Sunset Market Commentary – Action Forex

Markets

Global PMI’s took center stage today. The eurozone composite measure increased from 46.7 to 47.1 (vs 46.5 expected). The minor increase ended a 4-month decline which took the PMI from a solid 54.1 in April to current contraction levels. The EMU services PMI followed a similar path, gently rebounding from 47.9 to 48.4. The EMU manufacturing PMI stabilized around 43.4, marking the 15th consecutive <50 print. Details showed a further deterioration in the order situation with companies still reducing the stock of purchased goods. However, the destocking process may bottom out over the next few months in line with the worldwide trend, which is an important precondition for the expected recovery of the manufacturing sector at the beginning of 2024. Details of the services PMI showed shrinking business and orders as well, but companies keep hiring. Input and output prices keep rising and should remain top of mind at the ECB. Especially the risk of a wage-price spiral is high. S&P global, responsible for the PMI survey together with Hamburg Commercial Bank, estimates euro zone growth to have dropped by 0.4% Q/Q in Q3 based on the outcome of July/August/September PMI’s. On a national level, France significantly underperformed linked to a deterioration in the luxury goods business and services industry overall.

Markets were wrongfooted by the disappointing French data, published first. They sent German yields over 5 bps lower at the start of European trading. The move didn’t last though with markets recovering as Germany/EMU PMI’s bucked the French trend and with the huge US Treasury sell-off since Wednesday’s FOMC meeting in mind. At the time of writing, German yields add 0.5 bps (2-yr) to 3.5 bps (30-yr). The German 10-yr yield is again testing the cycle top at 2.77%. The German 30-yr yield exceeds 2.9% for the first time since end 2011. EUR/USD followed this intraday pattern, spiking to 1.0620, before rebounding to 1.0650. So far, key support at 1.0611/34 survives. US Treasuries take a breather after this week’s beating with yields 2 to 3 bps lower ahead of in line with consensus September US PMI’s. EUR/GBP tested 0.87 resistance as September UK PMI’s fell short of expectations. The composite gauge declined from 48.6 to 46.8 (vs 48.7) strengthening BoE Bailey’s dovish hold yesterday. UK Gilts outperform with Gilt yields falling up to 5 bps at the front end (2-yr). European and US stock markets test key support levels (EuroStoxx50: 4175, S&P 500: 4335, Nasdaq: 13162) , but avoid a drop lower for now.

News & Views

Governor Ueda spoke after the Bank of Japan this morning kept the policy rate unchanged at -0.1% and the 10-y yield target at 0%. The reason for doing so despite inflation turning out to be sticky well above the 2% target, is “Because we aren’t in a state where inflation accompanied by wage growth — sustainable and stable inflation — is in sight.” Ueda admitted price growth had been faster than expected but sticks to the view that it would start to slow more clearly in coming months. The ultra-easy monetary policy stance has pressured the Japanese yen against the likes of the euro and the dollar. The BoJ governor did not comment on recent moves but said that he was looking at the FX market closely and is in close communication with the government (which carries out FX interventions if they decide to). USD/JPY inches higher today to north of the 148 barrier. The 150 level at which interventions took place in October last year remains in clear sight.

Hungary’s minister for economic development Nagy said the central bank should avoid keeping interest rates too high as inflation slows. The former central bank deputy governor said that excessive real rates could hurt consumption and thwart Hungary’s recovery process. He forecasts CPI inflation to drop from 16.4% in August to below 10% in November and to 8% in December. This compares to a current shadow policy rate of 14%, which in all likelihood is to be lowered to 13% next week to match the regular base rate again. Nagy expects the economy to exit its now one-year long recession in Q3. The forint together with other CE currencies including the CZK and especially PLN strengthened today but pared gains after Nagy’s comments hit the screen. EUR/HUF is currently changing hands around 387.53, marginally down from an 388 open but higher than the 386 intraday low.


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