MNI US OPEN - PMIs Detail Soft Continental Manufacturing Sector

NEWS

MNI POLITICAL RISK ANALYSIS-Underperformance Of The Right Raises Risk Of Paralysis, Snap Election
Spain’s 23 July general election delivered a hung parliament in which the formation of a majority coalition government, or even a sustainable minority administration, is not assured. A significant underperformance by the centre-right Popular Party (PP) and the right-wing nationalist Vox means that the two parties combined seat total sits short of a majority.
Full PDF Review here.

SPAIN (MNI): Catalan Separatists Issue Demands As Vox Falters In Election
The hardline Catalan separatist party, Junts, has issued a set of demands to Spanish Prime Minister Pedro Sancho after neither the ruling centre-right PSOE, nor the center right People's Party (PP) secured the votes to form a government in yesterday's election. According to Reuters the Junts said, "we need to use the opportunity given by the election to achieve our goal of Catalan independence... we will see what [Sanchez] is ready to do and which guarantees he would offer in a possible investiture vote."

ITALY/CHINA (BBG): Meloni May Signal Plan to Exit China Pact During US Visit
Italian Prime Minister Giorgia Meloni could notify the US as soon as this week about her plan to pull Italy out of a controversial investment pact with China, according to people familiar with the matter. Meloni is set to discuss the issue when she meets US President Joe Biden at the White House later this week, the people said, cautioning that a final decision has not been taken yet.

US/ISRAEL (BBG): Biden Urges Netanyahu to Delay Vote on Judicial Reform Bill
US President Joe Biden is making a last-ditch effort to urge Prime Minister Benjamin Netanyahu to reconsider a vote on a reform of Israel’s judicial branch. “Given the range of threats and challenges confronting Israel right now, it doesn’t make sense for Israeli leaders to rush this — the focus should be on pulling people together and finding consensus,” Biden told Axios in a statement.

US (MNI): RRP Drop Creates Headroom for Fed QT To Run
A USD400 billion drop in uptake from the Federal Reserve's reverse repo facility since the resolution of the debt ceiling debacle is removing a major obstacle to the central bank's plans to keep shrinking its balance sheet by preserving liquidity in the banking system, former New York Fed open markets desk trader Joseph Wang said in an interview.

US (BBG): Housing-Market Rebound Poses Challenge for Fed’s Inflation Fight
Home prices are again on the rise after a brief dip last year, complicating the Federal Reserve’s effort to contain inflation and raising questions about how much further policymakers will have to hike interest rates. Demand for homes around the country continues to outpace supply, despite a rapid rise in borrowing costs spurred by the US central bank. While signs of easing price pressures have some policymakers eyeing the end of their tightening campaign, they could end up having to increase rates higher or hold them there for longer if the resilient housing market leads to slower progress on inflation, economists and Fed officials say.

CHINA (MNI): Boost Public, Private Investment - NDRC
MNI (Beijing) China will take measures to boost private investment in public projects, according to Luo Guosan, director at the National Development and Reform Commission (NDRC). At a press conference on Monday, Luo said the state planner will promote private sector opportunities in public projects and create online and offline channels to expand private firm participation in national policy objectives. After the press conference the NDRC issued a notice further detailing measures to support private enterprises including boosting investment in infrastructure REITs.

DATA

MNI: UK JUL FLASH MANUF PMI 45.0 (FCST 46.0); JUN 46.5
UK JUL FLASH SERVICES PMI 51.5 (FCST 53.0); JUN 53.7

MNI: EUROZONE JUL FLASH MANUF PMI 42.7 (FCST 43.5); JUN 43.4
EUROZONE JUL FLASH SERVICES PMI 51.1 (FCST 51.6); JUN 52.0

MNI: GERMANY JUL FLASH MANUF PMI 38.8 (FCST 41.0); JUN 40.6
GERMANY JUL FLASH SERVICES PMI 52.0 (FCST 53.1); JUN 54.1

MNI: FRANCE JUL FLASH MANUF PMI 44.5 (FCST 46.0); JUN 46.0
FRANCE JUL FLASH SERVICES PMI 47.4 (FCST 48.5); JUN 48.0

July Flash PMIs Theme: Weaker Demand, Softer Inflation

Flash July Eurozone PMIs missed expectations to the downside, with manufacturing heading even deeper into contraction and the services sector decelerating more quickly.

• Eurozone Manufacturing registered 42.7 vs 43.5 expected and 43.4 prior; Services dipped to 51.1 vs 51.6 expected and 52.0 prior, dragging composite down to 48.9 vs 49.9 prior.
• Per the HCOB/S&P Global report, the Eurozone Composite was an 8-month low, with Services at 6-month lows and Manufacturing at 38-month lows.
• The common theme across the German, French, and Eurozone-wide readings is a slowdown in price pressures (focused largely in the manufacturing sector, with services mixed), alongside weaker demand evident across softer output, new orders, and exports.
• Overall Eurozone PMI future output expectations and new order inflows weakened (to the lowest vs output since 2009), with manufacturer selling prices falling to 2009 levels, with services inflation at a 21-month low. Backlogs are falling sharply and employment was the softest since Feb 2021.
• If anything the ex-Germany/France data was a bright spot ("eked out only very modest growth" for a 2nd consecutive month for the weakest reading of 2023 "reflecting an increasingly severe downturn in manufacturing and weaker demand growth for services."
• While Services continues to be a relative bright spot vs a cratering of manufacturing, the data overall paint a picture of overall weakening Eurozone economic activity translating into softer price pressures, as we head to the ECB's decision on Thursday.

Weakest PMIs Since Nov 2020 Suggest Worsening Contraction

French July flash PMI Manufacturing came in at at 38-month low 44.5 vs 46.0 expected (and 46.0 prior), with Services at a 29-month low 47.4 vs 48.5 expected (48.0 prior), dropping Composite to 46.6 vs 48.0 prior.

• This was the worst Composite outturn since Nov 2020 and suggested that the suggested contraction in French activity at the end of Q2 was deepening going into Q3 (see chart).
• As more broadly in Europe in this round of PMIs, this was largely a weaker demand story: new business fell for a 3rd consecutive month and at the fastest rate in over 2.5 years, with backlog-clearing helping prop up activity.
• Notably export business dropped sharply, with the report noting softer Chinese demand than had been hoped.
• That meant French input/output costs falling to the lowest in over 2 years, though there appeared to be some divergence here, with manufacturers reporting lower raw material prices and service providers noting higher wage bills.
• A couple of positive areas: job growth continued (albeit at the weakest rate of 2023), while confidence strengthened vs June again led by Services firms (manufacturing sentiment remained pessimistic).

Recessionary Report, But Services Prices Still Look Stubborn

German Manufacturing activity contracted sharply per the July flash PMI reading of 38.8, which was well below the 41.0 expected and the 40.6 prior. Services also decelerated to 52.0 vs 53.1 expected (and 54.1 prior), with composite well into sub-50 territory at 48.3 vs 50.6 prior.

• While the Composite reading was merely an 8-month low, and Services a 5-month low, Manufacturing's slump represented a 38-month low with production falling at the fastest rate since May 2020 "amid rapidly declining demand for goods" (per the HCOB / S&P Global report).
• The Services outlook wasn't positive either: new business fell for the first time in 6 months and overall composite new orders posted the worst reading in 3 years amid a range of demand-hampering factors including " customer hesitancy, destocking, high inflation and rising interest rates".
• With backlogs declining quickly, expectations toward future activity were the worst since December 2022, and employment growth slowed to the joint-weakest in 2.5 years (Services hiring slowed, while manufacturing jobs dropped outright for the first time since January 2021).
• The "good" news was a continued deceleration in price pressures. The bad news is that there is a divergence here between manufacturers and the services sector. Overall costs were the lowest in nearly 3 years, but this was due entirely to a sharp drop for manufacturing prices (both input and output), vs service sector costs accelerating vs June (again, both input and output).
• This is a recessionary set of data, with the report noting that “over the last few months, we have seen a jaw dropping fall in both new orders and backlogs of work, which are now declining at their fastest rates since the initial Covid wave at the start of 2020. This doesn’t bode well for the rest of the year".
• The wrinkle here is that services inflation looks more stubborn than that of goods, which somewhat complicates the ECB's assessment of the overall inflation dynamics amid a clearly weakening demand picture.

CHINA: Politburo Signal Action on Property, Local Govt Bonds

CNH improved off the lower levels of the session on the Politburo headlines, helping USD/CNH backtrack below 7.20. Headlines from the Politburo flag increased action on the property market in particular and signals continued action on ensuring domestic demand.

China are to:

• 'Enliven' capital markets, boost investor confidence
• Keep CNY rate 'basically' stable
• Optimize, adjust policy on the property sector
• Resolve local government debt risks

FOREX: EUR Falters as PMIs Sink Faster Than Forecast

• The single currency underperforms all others in G10 ahead of Monday's NY crossover following a softer-than-expected set of flash PMI figures. Manufacturing was a particular weakpoint, with Germany's figures the standout. Germany's July flash manufacturing PMI fell to 38.8 vs. Exp. 41.0 (Prev. 40.6) - undermining the argument that the ECB could follow with further policy tightening after an assumed 25bps hike in July.
• EUR/USD slipped to 1.1066, the lowest level since Jul12, narrowing the gap with key support at 1.1055, the 50% retracement for the early July upleg.
• UK manufacturing and services PMIs following in kind, with GBP plumbing new daily lows on the release. GBP/USD showed just below the Friday low to touch 1.2815. A lower close Monday would mark the seventh consecutive session of declines, with 1.2801 the next support: the 61.8% retracement for the early July upleg.
• Focus Monday turns to US flash PMIs for July, ahead of the Fed, ECB decisions later in the week.

BONDS: Fresh Highs For Bund Futures As UK PMI Disappoints

The softer than expected UK PMI data has boosted Bund futures after the previously outlined fade in the bid around the time of the Eurozone PMI readings, allowing the contract to register fresh highs for the day, beyond 134.00, before ticking back below the figure. The German cash benchmarks run 5-8bp richer as the curve bull steepens. Similar degrees of flattening have been seen on the remainder of the core/semi-core EGB curves, with the major benchmarks there generally somewhere between tracking Bunds to seeing modest underperformance. Peripherals have lagged the wider rally, with the Spanish political situation providing headwinds for SPGBs, while BTP widening has generally paced that seen in their Spanish equivalents.

EQUITIES: Equity Futures Off Friday Lows Following European Open

The E-mini S&P contract is trading below last week’s high of 4609.25 (Jul 19). Prices have tested the top of the bull channel drawn off the March 13 low - the channel top intersects at 4616.73 today. A clear channel breakout would strengthen bullish conditions. Eurostoxx 50 futures are in consolidation mode but continue to trade closer to their recent highs and price remains above the 50-day EMA at 4348.70. Attention is on key resistance and the bull trigger at 4447.00, the Jul 3 high.

• Japan's NIKKEI closed higher by 396.69 pts or +1.23% at 32700.94 and the TOPIX ended 18.98 pts higher or +0.84% at 2281.18.
• Elsewhere, in China the SHANGHAI closed lower by 3.584 pts or -0.11% at 3164.161 and the HANG SENG ended 407.11 pts lower or -2.13% at 18668.15.
• Across Europe, Germany's DAX trades higher by 6.87 pts or +0.04% at 16181.44, FTSE 100 higher by 3.61 pts or +0.05% at 7668.22, CAC 40 down 16.19 pts or -0.22% at 7415.09 and Euro Stoxx 50 down 11.25 pts or -0.26% at 4379.23.
• Dow Jones mini up 47 pts or +0.13% at 35451, S&P 500 mini up 7.25 pts or +0.16% at 4571.75, NASDAQ mini up 37.25 pts or +0.24% at 15574.25.

COMMODITIES: WTI Uptrend Intact For Now

The uptrend in WTI futures remains intact. Friday’s print above $77.15, the Jul 13 high, reinforces the bullish theme. A clear break of this resistance would confirm a resumption of the trend and open $78.10, the Apr 24 high. Gold conditions remain bullish for now and the latest pullback is considered corrective. Last week’s print above $1985.3, the May 24 high, reinforces current conditions. A resumption of gains would pave the way for a climb towards $1998.1.

• WTI Crude down $0.24 or -0.31% at $76.84
• Natural Gas down $0.01 or -0.18% at $2.708
• Gold spot down $1.16 or -0.06% at $1960.53
• Copper down $2.95 or -0.77% at $378.75
• Silver down $0.11 or -0.44% at $24.498
• Platinum down $1.86 or -0.19% at $963.45