MNI US MARKETS ANALYSIS - Eurozone PMIs Flash H2 Recession Risk

US TSYS SUMMARY: Belly-Led Rally On Contractionary Eurozone PMIs

• Treasuries firm as European growth fears from contractionary PMIs add to yesterday's US data misses (including a soft Philly Fed), with gains unsurprisingly led by the belly against that backdrop. The Eurozone service PMI touched at a 15-month low of 50.6 and mfg a 25-month low of 49.6, whilst the manufacturing output measure that feeds into the composite fell even further below 50 at 46.1.
• 2YY -4.6bps at 3.039%, 5YY -6.3bps at 2.919%, 10YY -5.5bps at 2.820% and 30YY -2.6bps at 3.106%.
• TYU2 trades 22+ ticks higher at 119-19+ on strong overnight volumes. It easily clears resistance at 119-06 (Jul 13 high) and opens the bull trigger at 120-16+ (Jul 6 high).
• Data: S&P Global Mfg, Service & Composite PMI, July prelim. (0945ET)
• No issuance

STIR FUTURES: European Contraction Fears Weigh On Fed Hikes

• Fed Funds implied hikes have slipped with growing Eurozone contraction fears following notable misses in the preliminary PMIs for July with EA services at a 15-month low of 50.6 and mfg a 25-month low of 49.6.
• Sitting with a 78bp hike priced for next week (-1bp), 139bp for Sep (-1.5bps) and 182.5bp for Dec (-5.5bps) to 3.41% now seen as terminal with larger drops further out and almost 60bps of cuts for 2023.
• It ramps up focus on today’s US PMIs following a weak Philly Fed survey contradicting a tentative bounce in the Empire State survey.

Cumulative hikes implied by FOMC-dated Fed Funds futuresSource: Bloomberg

EGB/GILT SUMMARY: PMIs Point To Contraction

European government bonds have rallied sharply this morning, spurred on by a weak set of PMI data which point to a contraction in economic activity.

• Following yesterday's ECB meeting, Peter Kazimir has stated that the September rate hike may be 25bp or 50bp. His comments dilute the possibility of a larger than 50bp hike and come after the ECB abandoned specific guidance for September - both of which are likely in response to the deteriorating growth outlook.
• German preliminary PMI data for July show a broad contraction in activity across the main sectors of the economy, while in France the manufacturing PMI pushed below 50 at the same time that the service sector held on in expansion territory. Overall, for the wider region, the euro area composite PMI came in at 49.4 vs 51.0 expected and down from 51.3 the previous month.
• All of the UK readings meanwhile, remained above 52.
• Bunds have rallied through the morning with the curve bull steepening. Cash yields are down 10-20bp with the 2s30s spread narrowing 10bp.
• OATs have similarly made strong gains with yields 11-21bp lower on the day.
• Even with the political crisis simmering in the background, BTPs have outperformed core EGBs with yields down 14-27bp.
• Gilts have underperformed the broader regional rally with yields 10-13bp lower.
• Supply this morning came from the UK (UKTBs, GBP3.5bn).

FOREX: EUR/USD Through Post-ECB Lows as PMIs Flash Recession Warning

• After EUR/USD's flat finish on Thursday, the pair has slipped through the overnight lows to touch 1.0130 on the back of a series of particularly poor PMI numbers from across Germany and France. This tipped the Eurozone-wide flash composite PMI below 50 for the first time since the lockdown-induced slowdown in early 2021.
• Despite this, ECB speakers continue to talk up the prospect of rate hikes across H2, with Kazimir this morning going through the likelihood of a further 25 or 50bps rate rise in September - the first in a series of "similar steps".
• With the EUR weaker across the board, the greenback is the main beneficiary, putting the USD Index back above the 107 level but still comfortably off the Monday highs of 108.036.
• Having sold off alongside the EUR this morning, GBP saw some reprieve on a better set of manufacturing, services PMIs, which seemed to counter the mixed messages in the morning's retail sales report. EUR/GBP is through the Thursday low and narrowing the gap with Monday's 0.8458.
• Focus going forward turns to the prelim US PMI data that's still expected to slow a modest rise is activity, as well as Canadian retail sales for May.

FX OPTIONS: Expiries for Jul22 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0080-00(E1.4bln), $1.0140-50(E925mln), $1.0200-10(E562mln)
• USD/JPY: Y135.00($1.1bln), Y139.00($630mln), Y140.00($990mln)
• EUR/JPY: Y141.00(E485mln)
• AUD/USD: $0.6800(A$1.2bln), $0.6900(A$1.1bln)
• USD/CAD: C$1.2900($965mln), C$1.3000($602mln)
• USD/CNY: Cny6.7500($1.7bln), Cny6.8000($1.1bln)

Price Signal Summary – Bund Futures Remain Bought on Dips

• S&P E-Minis extended the recovery into the Thursday close, touching 4004.75 in the process and nearing first key resistance at 4017.94. EUROSTOXX 50 futures extended gains early Wednesday before fading into the close. Nonetheless, this week’s price action means prices have taken out resistance at both 3504.00, the Jul 8 high, the 50-day EMA at 3553.60 as well as 3584.00, the Jun 27 high. This suggests scope for a stronger short-term recovery.
• EURUSD’s brief post-ECB rally stalled and fully reversed into the Thursday close, putting the pair flat through the London fix. The 20-day EMA resistance at 1.0258 was pierced, but the lack of a clear break higher keeps the technical picture unchanged for now. GBPUSD remains above the week’s lowest levels, but traded weaker Thursday. recovered from last week’s lows. This price action retains the sell-on-rallies theme, which keeps short-term gains considered corrective. EURJPY rallied to new weekly highs of 142.32 Thursday, but faltered ahead of the close, erasing the entirety of the move higher to finish flat. This keeps the outlook bearish, with focus on the downside trigger of 136.87.
• Gold bounced solidly off the Thursday low of 1680.99, keeping prices inside the recent range, with buy-on-dips clearly the dominant strategy. For now, the outlook is bearish and the yellow metal remains in a downtrend. WTI futures traded under pressure into the Thursday close, briefly putting prices below the $95/bbl handle and nearing first support of the Jul 15 low at $91.64.
• Bund futures came under initial pressure on the ECB rate decision, touching 149.69 before rebounding sharply. This reinforces the current buy-on-dips theme, with key support unchallenged. This keeps the broader theme positive following the recent break of 152.92, Jul 6 high. The short-term outlook in Gilt futures remains bullish, with pullbacks proven corrective into the Thursday close. Recent gains confirmed a resumption of the bull cycle that started Jun 16 - price cleared resistance at 114.55, the Jun 24 high.

EQUITIES: Europe Stocks Embrace More Dovish ECB Hike Outlook

• Asian markets closed mostly stronger: Japan's NIKKEI closed up 111.66 pts or +0.4% at 27914.66 and the TOPIX ended 5.38 pts higher or +0.28% at 1955.97. China's SHANGHAI closed down 2.027 pts or -0.06% at 3269.974 and the HANG SENG ended 34.51 pts higher or +0.17% at 20609.14.
• European equities are largely shrugging off recessionary PMI data (and perhaps embracing it with less ECB hiking now priced), with the German Dax up 20.51 pts or +0.15% at 13317.24, FTSE 100 up 16.64 pts or +0.23% at 7320.4, CAC 40 up 6.94 pts or +0.11% at 6216.02 and Euro Stoxx 50 up 4.51 pts or +0.13% at 3584.12.
• U.S. futures are a little weaker, with the Dow Jones mini down 10 pts or -0.03% at 31997, S&P 500 mini down 11 pts or -0.27% at 3990.25, NASDAQ mini down 70 pts or -0.55% at 12570.

COMMODITIES: Crude Slips Amid Recessionary Eurozone PMI Data

• WTI Crude up $0.29 or +0.3% at $96.65
• Natural Gas down $0.08 or -0.97% at $7.855
• Gold spot down $0.12 or -0.01% at $1707.94
• Copper up $1.75 or +0.53% at $331.65
• Silver down $0.11 or -0.61% at $18.7441
• Platinum up $5.9 or +0.67% at $882.97