Temporary ISM Discontinuation of US Services

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Markets

The US PMIs turned out to have the biggest impact on the intraday market yesterday. Traditionally, they don’t carry much weight and mainly focus on monthly ISM surveys. Significant drop in the ISM of American services in August (44.1 against 47.3 against 49.8 expected) temporarily halted the USD rally while providing (minor) intraday relief to US Treasuries. Especially since they were followed by a huge drop in new home sales (see below) and a bigger than expected drop in the Richmond Fed manufacturing index (-8 from 0 against -2 expected). In the end, they did not modify the technical images. EMU PMIs also fell earlier in the day, but the pullback was modest and largely in line with consensus. The US Treasury yield curve finally steepened with daily yield changes ranging between -1 bp (2 years) and +3 bps (30 years). The German yield curve also steepened with rate variations varying between -4 basis points (2 years) and +3.5 basis points (30 years). The long end of the yield curves likely suffered from a late surge in oil prices that took some time to absorb the Saudi hint of an OPEC production cut. Brent touched $100/bbl for the first time since early August. EUR/USD closed at 0.9970 after a volatile day between 0.9901 (new low) and 1.0018. The pound has recovered some additional ground against the euro after last week’s failed test in the EUR/GBP 0.85 zone. Gilt’s underperformance so far beats dismal green numbers. European and American stock exchanges managed to limit the losses to around 0.5%. Today’s green calendar is thin with only US durable goods orders and pending home sales. They will probably have no impact on the intraday market. Following yesterday’s price action (intraday attempt to correct prevailing trends), this setting could open the way for some consolidation. Since the start of last week, markets have shifted to a more neutral stance ahead of Friday’s keynote address at the Jackson Hole symposium by Fed Chairman Powell. Minneapolis Fed Kashkari overnight reinforces the Fed’s guideline that it is “very clear” that the Fed needs to tighten monetary policy further. The worst outcome is an unanchoring of inflation expectations that would require a Vocker response from the Fed. Therefore, frontloading is the way to go, even if the economy shows signs of slowing.

News headlines

July U.S. new home sales fell to their lowest level since 2016. Sales fell 12.6% M/M to an annualized pace of 511,000. The June figure was also revised down to 585,000. New home sales in July were 29.6% less than the same month last year. The peak of the current cycle was set in January 2021 (993k). The slowdown in sales is caused by a continued rise in mortgage rates. Yet house prices continue to rise. The the average price of new homes in the United States in July rose 18.3% year-on-year. At a time, the stock of new homes available for sale rose to 464,000, the highest level since 2008. While the construction of most of these homes was yet to be completed, the high inventory could gradually slow the rise in prices over time. According to a report by the CTK news service, the Czech government and trade unions have agreed a 10% wage increase from September for a group of 365,000 public sector employees. The increase applies to civil servants and non-teaching education staff. The salary increase is calculated to have an additional budgetary cost of CZK 1.1 billion This year. Wage growth for 2022 is still subject to a new agreement. The wage increase comes in a context where Czech inflation was already 17.5% year-on-year in July and is expected to approach the 20% zone later this year.

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