Weaker PMI weakens the case for a larger hike from the Fed

The latest U.S S&P Global composite purchasing managers’ index (PMI) unexpectedly slipped below the key 50 threshold to 47.5 on Friday (Jul/PREL). Markets had been expecting a dip to around 51.7 from last month’s 52.3 print. The drop through 50 matters to analysts as well as markets, as anything above is considered expansionary for an economy, and anything below therefore signals a contraction, and that hasn’t happened in the U.S since the beginning of COVID, back in June 2020.

A lack of service

Much of the decline could be attributed to reports from respondents in the service sector, and will add fuel to the fire of those suggesting that the Fed’s aggressive rate hikes are pushing the U.S economy towards a recession, and soon. The news may also take some of the zest away from the 100bps hiking brigade, as we rocket towards this week’s FOMC meeting. Given that PMI report, the latest estimates are now understandably settling on a 75bps hike from the Fed on Wednesday.

A bumpy end to the week

With Euro area PMI’s also missing estimates at 49.4 (from 52), as well as the German Composite PMI slipping to 48 from 51.3, markets finished the week on a particularly sour note. As well as those poor PMI’s, the tech-heavy Nasdaq also struggled from some negative earnings announcements, and most indexes followed the Nasdaq lower, which has continued through the Asia morning on Monday. Risk assets were driven lower as a consequence. In the commodity complex, both Brent and U.S Crude finished the week under $100bpl.

The greenback had a bad week

Whilst Friday’s news helped to push the greenback higher from a low base, the dollar actually finished lower for the first week since the end of May. Markets had been on a good run for the best part of a week, driving those dollar declines. However, the dollar index (DXY) slipped under 106.00 just ahead of the PMIs, before rallying 50pips into the close. GBP/USD actually finished the week above 1.2000, albeit by the narrowest of margins. With only z-list data scheduled out of the UK this week, the pound will take its lead from both the single currency, and ongoing dollar direction.  As we said in our weekly commentary, the Tory party leadership race could start to influence the pound, now that we are getting close to finding out who is likely to be the next prime minister.

Will the IFO disappoint?

After last week’s momentous (50bps hike) ECB meeting, the latest growth figures for the region are released on Friday. Ahead of then, today’s German IFO will help to shape the short-term profile for the single currency. The latest estimates predict a weakening across the board for the IFO, as the German economy continues to struggle against a plethora of varying headwinds. The headline Business Climate may dip to around 90.5 from 92.3. EUR/USD finished the week over 200 points above parity (at 1.0215), with most of the move (once again) being fuelled by a weaker dollar, as opposed to the ECB’s actions. GBP/EUR had a particularly volatile week, trading both above 1.1800 and below 1.1650, before closing around 1.1750.

Retail Sales surge in Canada

The latest Canadian Retail Sales report (MoM/May) easily beat expectations, with a 2.2% gain throughout may, well ahead of the 1.6% estimates, and 0.7% previous print, marking a fifth consecutive jump for Retail Sales in Canada. Much of the increase could be attributed to the autos sector. USD/CAD has now moved from over 1.3200 to around 1.2900, and as in the case of EUR/USD, the greenback being the main contributor behind the decline.

What else is happening today?

USA – Chicago Fed National Activity Index (Jun), Dallas Fed Manufacturing Business Index (Jul)

JPY – BoJ Monetary Policy Meeting Minutes, Corporate Service Price Index