Weak purchasing manager surveys in the US and Europe raise concerns about the strength of the global economy. Expectations of large-scale Chinese stimulus being pared back

Weak purchasing manager surveys in the US and Europe, reflecting the impact of cumulative tightening in monetary policy, have raised concerns about the strength of the global economy.  Meanwhile, expectations that China will announce large-scale stimulus at this week’s meeting of top leaders has been pared back.  The meeting indicated support for the troubled real estate sector and measures to boost consumption but did not include language indicating major fiscal or monetary easing.

US equities gained despite the signs of slowing global growth. The S&P added 0.5% while European indices closed little changed ahead of key central bank meetings and a busy week for corporate earnings.

Advance PMIs for June suggest that the Eurozone economy has slowed further. The downturn continues to be led by the manufacturing sector, while the slowdown in services sector growth that started last month has extended into July. The composite index fell to 48.9 from 49.9 in June pointing to a weak start for Q3. The regional composite indices revealed France and Germany falling to 46.6 and 48.3 respectively. The forward-looking orders component is pointing towards further weakness ahead and prices for goods and services rose at the slowest pace in more than 2 and a half years.

After a cumulative 400bps of hikes, the PMI data suggests that the European Central Bank can move to more data dependent stance when it considers future monetary policy decisions after the anticipated 25bps hike on Thursday morning (NZT).

In the US, the composite PMI index slipped to 52 from 53.2 the previous month but in a contrast with Europe, manufacturing rebounded while services underperformed expectations.

Global bond markets rallied following the release of the European PMI data. 10-year bunds yields closed down 5bps at 2.41% which larger moves in front end bonds contributing to a steeper yield curve. An earlier rally in UK gilts faded with 10-year bonds closing close to unchanged.

US treasuries initially moved lower in yield aligned with the move in European markets before reversing higher. 2-year bonds traded to a low of 4.82% and are now up 5bps with solid demand from investors noted in US$42 billion auction. 10-year treasuries lagged the move and are up 2bps to 3.85%.

In currency markets, the US Dollar was mixed against G10 currencies. EUR/USD fell to 1-week lows after the PMIs. The Yen stabilised, after several days of losses, on reports that the Bank of Japan (BOJ) is considering large increases to its inflation forecasts for the 2023 fiscal year although this is unlikely to result in any imminent monetary policy change at this week’s meeting given recent commentary by BOJ officials.

NZD/USD was amongst the better performing developed market currencies overnight rebounding from 1-week lows back above 0.6200. The NZD outperformed on the cross rates with NZD/AUD trading back above 0.9200.

NZ domestic fixed income markets moved lower in yield in the local session yesterday with swaps down 5bps across the curve in a largely parallel move. Swaps outperformed NZGBs which were 3bps lower across the curve. Australian 3 and 10-year bond futures are close to unchanged in the overnight session from the local close yesterday.

There is no domestic data being released today and the focus overnight with be the German IFO survey and US consumer confidence.