More soft Manufacturing signals

Markets remained calm this week with risk sentiment improving further. Stock markets continued to trade higher taking S&P500 back to the recent highs reached in mid-July and cyclical metal prices increased as well. Bond yields drifted moderately lower in the US while EUR/USD continued higher to the highest level in a year. The next big market mover the market will be awaiting will come in two weeks with the US employment report on 6 September followed by the ECB meeting on 12 September.

In the euro area PMI data for July painted a soft picture as PMI manufacturing dropped from 45.8 to 45.6 (consensus 45.8). While PMI services increased from 51.9 to 53.3, it was driven mainly by a big increase in France related to the Olympics. The weaker manufacturing picture fits with the recent loss of manufacturing momentum witnessed in China. On the euro inflation front this week provided some encouraging news as negotiated wage growth for Q2 dropped to 3.6% y/y down from 4.7% y/y in Q1.

US economic news provided a mixed bag. PMI manufacturing also dropped here - from 49.6 to 48.0, the weakest number since December. PMI service, however, stayed at a robust level at 55.2. The leading indicator from Conference Board softened from -0.2% m/m to -0.6% m/m in July (consensus -0.4% m/m) but the indicator has not performed so well in the past couple of years as the economy has performed better than the indicator suggested. The weekly jobless claims get more attention with the increased focus on the labour market, but they did not provide much news as they were broadly unchanged at 232k versus 228k the week before. BLS released a preliminary annual revision of the employment data and reported a revision of -818k jobs. The market did not react much, though, and a couple of Fed speakers stated it did not change their view of the labour market.

Fed speakers as well as the FOMC minutes generally signalled more confidence with getting inflation back to 2% while some members have increasingly turned their attention to risks in the labour market. However, the overall message is still that a gradual path of rate reductions is expected for now but that it will be data dependent. Hence, a path of moving with 25bp increments is currently seen as most likely. The market currently prices 100bp of easing over the next three meetings, which entails a move to a 50bp cut on one of the meetings, which we do not expect. Should the labour market cool faster than expected, though, the Fed would likely turn to 50bp steps of easing as they start from a quite restrictive stance.

Focus the coming week will be on Flash euro area CPI for August, a key data point ahead of the ECB meeting on 12 September. Focus is on core inflation which we forecast to only marginally decline to 2.8% from 2.85% as service inflation likely remained sticky. The euro area also releases consumer confidence and unemployment numbers. In the US we get consumer confidence from Conference Board, where the labour market questions 'jobs hard to get' and 'jobs plentiful' will be in focus. Finally in Japan, we will get retail sales, industrial production and Tokyo CPI. China is not releasing any tier-1 data and policy rates will likely stay on hold after they were cut last month.

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