Daily Market Pulse

PMI flash data point to a softening economic recovery pace

7 minute read


On Wednesday, the dollar index finished up +0.27% against a basket of major currencies. The current level is the strongest since late July. IHS Markit, a data firm, commented that the U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, slightly fell from 54.6 in August to 54.4. Though the U.S economy continues to expand, it is losing speed. However, it is important to highlight that the U.S. economic recovery pace seems more solid than in other developed economies. The USD also found support after the Federal Housing Finance Agency showed that the house price index rose a seasonally adjusted 1.0% in July after a similar gain in June. House prices jumped 6.5% on a year-on-year basis in July. The housing market is pressing ahead, driven by historically low mortgage rates. Today, market participants will get another update on how the U.S. Labor Market is faring amid Covid-19. 


According to Purchasing Managers Index (PMI) data, released yesterday, the economic recovery in the euro-area took a slight hit this month. The Manufacturing PMI jumped from 51.7 in August to 53.7 in September, while the Service PMI fell from 51.9 to 47.6. Taken together, the Composite PMI Index fell to 50.1 from 51.9 in August. Thus, the PMI landed very close to the 50-mark separating growth from contraction. The economic recovery seen last month is already cooling down a little bit, signaling a fractional deterioration in operating conditions in the service sector. Even though the eurozone monetary policy environment is still supportive of growth, the weakness in recent data, as well as, a rising number of Covid-19 cases in Europe have sparked concern. Today, the European Central Bank will announce a review of its €750 billion pandemic emergency purchase program, which aims to support the liquidity and the financial condition of all sectors of the eurozone economy.


Very similar to the U.S, the UK recovery was slow. The U.K. composite PMI declined to a three-month low of 55.7 this month, from a six-year high of 59.1 in August, which is much stronger than the Eurozone. According to HIS Markit comments, there were widespread reports that a lack of consumer confidence and persistent disruptions to business operations due to the pandemic had held back the recovery in September. Despite the recent data showing that the U.K economic recovery has lost some momentum, the PMI did not have a big impact on the FX market, with the GPB closing flat on Wednesday. The pressure still comes from (1) the proposition of a no-deal Brexit, (2) worries related to new Covid-19 restrictions imposed by the U.K. government, and (3) rumors about the Bank of England planning to set negative interest rates.


The Japanese yen weakened 0.44% versus the USD on Wednesday and refreshed daily lows. The risk-off atmosphere that has been gripping markets over this week has affected JPY both positively and negatively. On the one side, this environment extends some support to the JPY, due to its currency safe-haven status. On the other hand, it is also a key factor to increased pressure on the USD/JPY pair. According to Japan Department Stores Association, department store sales in the country were down 22% last month from a year ago for the 11th straight month of decline, hit by the Covid-19 crisis and hot weather which caused people to refrain from going out. Now, there are fresh concerns that this sharp drop in department store sales will continue in the coming months as the second wave of Covid-19 infections contributes to the imposing of new restrictions on people’s mobility.


The CAD felt the impact of a declining oil price yesterday and closed with losses. A new threat that the second wave of Covid-19 cases could lead to the return of severe lockdown and mobility restrictions faded prospects of any substantial recovery in the petroleum demand. The West Texas Intermediate (WTI) crude oil erased a large portion of its daily gains, which fell around 1% on Wednesday and remained depressed below $40/barrel, a psychological market level. Meanwhile, the prime minister’s speech yesterday from the throne included calls for green investments and a plan to create more than a million new jobs. Not only a key part of the speech was a project to raise revenue by finding “additional ways to tax extreme wealth inequality” including “tax avoidance by digital giants”, but also the speech focused on the growing concern over the power of tech companies like Facebook.


The Mexican peso slipped 2.5% against the USD on Wednesday, after the country reported 4,786 new Covid-19 cases in just one day, taking the total infections in the country to 710,049 and death tolls to 74,949. Mexico’s finance ministry, Mr. Arturo Herrera, extended tools to allow banks and other financial institutions to restructure loans and other credits to clients, in the government’s latest push to help the faltering Mexican economy. The measures will extend until next year, several temporary rules designed to avoid defaults and loss of collateral from companies and families. The focus turns to Mexico’s central bank policy statement later today, where the pace of interest rate cuts is expected to slow.


The CNY dropped slightly (-0.12%) against the USD today, as worries about the global economy supported a safe-haven rally in the USD. The market’s warnings against a rapid rise in the CNY also helped check recent gains. The People's Bank of China does not want the yuan to be too strong, because it could hut China’s exports. The CNY has softened since reaching 6.7501 to the U.S dollar on September 17, its strongest level since late April 2019. In Asian stock markets, Chinese stocks fell, with energy and technology companies leading losses: Shanghai Composite index was down 1.46% and China’s blue-chip CSI300 index was down 1.63%. The fall in stock prices also highlights doubts about how the world economy will stagger back to recovery.


The BRL traded lower (-2.16%) again on Wednesday and extended losses for a 5th straight session. Trader’s and investor’s attention remain focused on fiscal policy, with rumors of the recreation of CPFM - a financial transaction tax that was in place between 1997 and 2007 - on digital financial transactions. Also, the negative BRL performance came from the new country’s inflation data. The Broad Consumer Price Index – 15 (IPCA-15), stood at 0.45% in September, as disclosed yesterday by the Brazilian Institute of Geography and Statistics – the highest for the month since 2012, when it was 0.48%. Nonetheless, the market’s inflation expectation for this year remains below the government’s central target for the IPCA, of 4%, and also the floor of the target system, which is 2.5% this year. According to the Focus report, released on Monday by the Central Bank, financial market analysts estimate inflation of 1.99% in 2020.


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