Monex Europe: Eurozone PMI data were a mixed bag

24 augustus 2022

Simon Harvey, Head of FX Analysis at Monex Europe, has published his morning commentary referring to yesterday’s PMI data:

EUR

“Yesterday’s batch of eurozone PMIs were a mixed bag. On the one hand, services measures out of France and Germany both undershot expectations, however, the German manufacturing reading proved stronger-than-expected despite the sector being more exposed to the deteriorating energy market. Ultimately, FX markets focused on the German manufacturing print and retraced earlier losses in the euro despite the German data still pointing to a technical recession in the euro area's largest economy in the second half of this year. The main driver of the euro yesterday wasn’t eurozone PMIs, but the US data instead.

With PMI data out of the States also nosediving, the gloomier eurozone economic outlook didn’t stand out as much. With the data also trimming hawkish expectations of the Fed’s implied rate cycle, the euro rallied for the remainder of the day, with the pair even breaking parity at two points throughout the afternoon session. This highlights the continued appetite by institutional and corporate players to pick up the euro at historically cheap levels despite the bleak economic prospects and suggests that the single currency could bounce back above parity towards the end of the week should Fed officials cast a more conservative tone at the Jackson Hole Symposium.”

USD

“The dollar sold off on Tuesday following the release of undeniably weak US PMI data. All of the indices fell from the month prior and missed expectations, while both the composite and services measure printed further below the 50 threshold highlighting a contraction in economic activity.

The services measure provided the biggest shock and as services account for the bulk of US economic activity, this was a strong signal that America’s economic prospects have diminished quite dramatically. Alongside indications that inflation pressures would ease, as implied by falling input prices and anecdotal evidence that firms were having to trim margins to keep output prices competitive, as well as signs of falling domestic and foreign new orders, the implications of the report were clear: lower inflation and weaker growth mean less Fed tightening is needed.

The initial reaction in money markets saw the prospects of a 75bp hike on September 21 diminish from roughly two-thirds to less than half while the spread between the 2-year and 10-year Treasury yields narrowed, which sparked the sell-off in the dollar. Later in the day however, some of that pricing retraced, leading the dollar to recoup some of its losses. Nevertheless, DXY ended the day half a percent lower, with the USD down against every currency in the G10 basket. Today, as data calendars thin out yet again, the focus will be on how markets position for the incoming bombardment of Fed commentary at the annual Jackson Hole Symposium, which is scheduled to effectively begin on Friday.

At the start of the week, rates traders positioned for a Fed that would try to keep the prospect of a 75bp hike alive, even after signs that headline inflation has peaked. This helped the dollar trade on a stronger footing ahead of the PMIs. However, following yesterday’s data, this view has been scaled back somewhat. The difficult battle the Fed has is trying to relay that it is slowing the pace of its tightening cycle without effectively loosening financial conditions.

Back in July, when Chair Powell alluded to a 50bp hike in September and a potential slowdown to 25bp hikes as of November, markets inferred that this meant the Fed’s hiking cycle is nearing an end with a lower than previously expected terminal rate. Knowing forward guidance is a fool's game in this environment, Powell would like to avoid such an outcome again this week and will aim to keep all options on the table.”