Summary and Price Action Rundown
Global risk assets are mostly higher this morning as investors monitor generally encouraging manufacturing data from China and the EU, though varied price data and pronounced dollar weakness represent a challenge to central banks. S&P 500 futures point to a 0.3% higher open after the index edged 0.2% lower yesterday, paring its year-to-date gain to 8.3% and backing off Friday’s all-time high. Equities in the EU are posting upside as well, while Asian stocks were mostly higher overnight. A broad dollar index is extending its declines to a new 28-month low, while longer-dated Treasury yields are hovering near the top of their recent range, with the 10-year yield at 0.72%. Brent crude is advancing back toward $46 per barrel.
Solid Global Factory Data Reflects Crosscurrents Amid the Recovery
Another reading of China’s purchasing managers’ indexes (PMIs) for August, as well as finalized EU PMI readings, signaled ongoing recovery though some details were more nuanced. China’s privately-compiled Caixin manufacturing PMI for August, which features more input from mid-sized and private sector enterprises than China’s official PMI gauges, topped expectations, printing 53.1 versus a forecast of 52.5 and July’s 52.8. This marks the fastest pace of expansion for this series in nearly a decade. For context, PMI readings over 50 denote expansion in the sector. This bettered the official version of the manufacturing PMI released yesterday, which remained muted and slightly undershot expectations at 51.0. In the EU, the final prints of August manufacturing PMIs roughly matched their preliminary estimates, though Germany’s was revised down tow 52.2 from 53.0 and France was revised up from 49.0 to 49.8. This left the EU-wide August manufacturing PMI unchanged from its initial reading at 51.7. However, among the sub-indexes of these relatively encouraging EU factory PMIs, analysts point to notable weakness in the employment gauges. Later this morning, final prints for August’s US Markit manufacturing PMI will be released, as will the alternate metric of ISM manufacturing PMI, with both expected to stay firmly in expansionary territory.
Deepening Contrasts in EU and US Inflation Data
With the Fed putting US inflation metrics in the spotlight by revising its definition of price stability, the downside surprises in EU inflation raise the stakes for the European Central Bank. August consumer price index (CPI) for the EU sank into negative territory at -0.2% year-on-year (y/y), missing estimates of 0.2% y/y and declining from 0.4% the prior month. The core CPI reading, which strips out more volatile components, was 0.4% y/y but still missed a forecast of 0.8% and was down from 1.2% the prior month. The month-on-month pace of CPI remained at -0.4%, matching the disinflation rate of July. These readings, however, are not undermining the euro this morning, as the single currency reaches a new high versus the dollar since May 2018, with this appreciation trend representing a headwind to the reflationary efforts of the European Central Bank (ECB). Market-based gauges of longer term inflation expectations in the EU remain relatively depressed, though they have recovered significantly from the doldrums of the spring. Former ECB President Draghi’s favored metric, the EU 5-year/5-year forward inflation swap, has clawed its way back from 0.7% in March to 1.3%, but this remains near the bottom-end of its historical trading range and far from the ECB’s 2% inflation target. Meanwhile, the most recent slate of US price data from July registered broad upside surprises, with core CPI reaching 1.6% y/y. Though this reading also remains well shy of the now average 2% inflation target of the Fed, market-based gauges of US inflation expectations are generally back to levels close to or above 2% and the declining dollar is a tailwind for reflation.
Additional Themes
Australian Central Bank Retains Easing Bias – Although key rates and the ongoing asset purchase program were left unchanged in their meeting overnight, the Reserve Bank of Australia expanded its loan program for banks and the accompanying communications suggested that options for additional easing are being considered. The bias toward additional easing did little slow the Australian dollar’s ongoing ascent versus its US peer, with today’s slight appreciation registering a new high for Australia’s currency since June of 2018.
Beijing Weighs in on TikTok Buyout – Late last week, China’s Commerce Ministry expanded its list of restricted technologies for export to cover TikTok’s functions, effectively allowing it veto power over any potential sale of the US business of the app to suitors like Microsoft and Oracle. Chinese officials have likened the prospective sale to thievery, as the impending ban on the social media platform by the Trump administration precipitated the bidding. This adds an additional layer of complexity to a deal that analysts already expected to be a challenge to complete by the September 15th deadline imposed by the White House.