Focus on Euro area and US PMIs today

In focus today

Today, focus is on the euro area PMIs for September. The service PMIs got a 'golden boost' from the Olympics in France in August, which likely reversed in September. While we expect overall momentum in services activity remained broadly unchanged compared to August, we expect the PMIs to decline due to the French data. In the manufacturing sector, activity likely remained subdued as also indicated by the German ZEW.

We will also get preliminary US PMIs for September where we similarly expect the weakness in manufacturing to continue and for services to hold up activity. Also in the US, the Fed's Kahskari and Bostic are on the wire.

As for the rest of the week, on Tuesday we expect the RBA to keep their policy rate unchanged while we see a 50/50 chance that the PBOC will ease policy on Wednesday. On Friday, the ruling party in Japan will pick a new leader and thus a new PM.

Economic and market news

What happened over the weekend

In the Middle East, Lebanon's Hizbollah and Israel continued to exchange fire after a week of intensified hostilities that has seen several high-level Hizbollah members killed and missile attacks in both countries. Fears have risen that the conflict could escalate to a full-blown war which has contributed to higher oil prices during the week, though other factors including the Fed's rate cut also supported oil.

In France, PM Barnier presented a new government to President Macron, consisting of politicians from Macron's centrist party and Barnier's more conservative party. Uncertainty is still high as the French Parliament is highly fragmented and the government would need broad support to pass bills, but a new government would solve some of the political paralysis.

What happened on Friday

The yen continued to weaken after bucking its September rally at the beginning of the week, with USDJPY up 0.9%, after the BoJ left policy rates unchanged and indicated they were not in a large hurry to tighten further. Recent data has seen a pick-up in growth and the yen has recovered from its very weak levels in the middle of the summer (USDJPY -9.6% since late June) which has made hiking rates less acute.

Equities: Global equities were lower on Friday, with European stocks experiencing the most significant declines. Despite this, many indices are not far from all-time highs, and futures are pointing upward this morning in both Europe and the US. Additionally, there has been stimulus from China this morning in the form of an interest rate cut by the People's Bank of China. Japan is leading advances in Asia today, and the yen is continuing to weaken. On Friday, market performance was a mixed bag between cyclicals and defensives, yet utilities stood out by outperforming and being one of the few sectors in the green. In the US on Friday, the indices reported mixed results: Dow +0.1%, S&P 500 -0.2%, Nasdaq -0.4%, and Russell 2000 -1.1%.

FI: Friday's trading session was somewhat volatile with a slight direction for higher rates, with 10y German Bunds ending at 2.21%. France was clearly weak on Friday due to Les Echos reporting that the French budget was likely higher than previously forecasted, to around 6% of GDP. French-German yield spread is trading around 75bp.

FX: BoJ's decision to keep rates unchanged and signal no hurry to hike prompted broad JPY weakness on Friday. USD/JPY was up two big figures on the day. The Fed's first cut caused some volatility in the USD crosses, though USD losses were generally quite modest: at the end of the week, DXY had lost only 0.2% from pre-Fed levels. EUR/SEK kept within a tight range of 11.30-11.40 throughout the week, close to our fair value. EUR/NOK dropped from 11.80 to 11.70, which helped to push NOK/SEK towards 0.97.