Data highlight downside growth risks

OVERNIGHT

Asia-Pacific equity markets are mostly higher this morning led by a rise in Chinese indices propelled by hopes of more economic policy support. The Chinese authorities had earlier promised that it would adjust policy “in a precise and forceful” manner. Market expectations are likely to be volatile ahead of this week’s monetary policy updates in the US, Eurozone and Japan.  

THE DAY AHEAD

Following yesterday’s disappointing July Eurozone PMI reports, today’s German IFO survey, also for July, will provide a further timely update. The German composite PMI was below the 50 level for the second month in a row, signalling that the economy may be contracting. Manufacturing output was again particularly weak but services activity was also lower than expected, albeit still holding above the 50 level. 

The IFO readings are also forecast to show activity faltering with both the current conditions and expectations components projected to have fallen. Despite growing signs of weakening activity, the ECB is still expected to raise interest rates on Thursday but the data reinforces the case for it to keep its options open over whether any further moves will be needed in the autumn. 

Yesterday’s UK PMIs also disappointed, albeit the composite index remained above the 50-expansion level. The schedule for UK data ahead of next week’s Bank of England monetary policy update is now sparse but today’s July CBI industrial trends survey will bring an update on a sector that is struggling, not only in the UK but just about everywhere. Today’s update also contains the results of the more comprehensive quarterly survey and of particular interest will be what has happened to business investment intentions.

US consumer confidence measures have been volatile of late reflecting uncertainties about the outlook for inflation and interest rates. The Conference Board’s confidence measure rose sharply in June, and it is expected to have risen again in July partly because the alternative University of Michigan consumer sentiment index surged to its highest since mid-2020. This move probably reflects hopes that US interest rates may be close to a peak but it may also encourage the Fed to move cautiously on ruling out further hikes.

Australian inflation data out early Wednesday will an important determinant of whether the Aussie central bank raises interest rates any further. It left them unchanged this month but hinted at the possibility of further rises and last week’s stronger than forecast labour market report suggests that this remains a possibility. 

MARKETS

UK and Eurozone bond yields moved lower yesterday after weaker than expected economic data. US Treasury yields also slipped initially but rebounded to finish up on the day. In currencies, both the euro and sterling fell against the US dollar yesterday but have partially rebounded overnight.