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All for nought? The day after the ECB manages to finally raise rates, we get a big fat recession warning from the PMIs. You can always rely on the ECB to mis-time the move…of course hikes are designed to slow the economy, it’s just that usually you’d be looking to do that far earlier in the cycle like when the going was good in 2021.  

The euro heads lower again this morning as European purchasing manager indices point to contraction for both manufacturing and services across the bloc. Germany’s flash composite index slipped to 48.0, a 25-month low, whilst France’s declined to 50.6, a 16-month low. Inflation remains elevated but continued a slight downward trend. Lots of discounting on a build-up of too much inventory. Notable fall in new business. In Germany, business expectations about the future sank into negative territory for the first time since May 2020, the height of the first wave of the COVID pandemic. 

The euro has erased all the gains made after yesterday’s jump on the European Central Bank decision to raise rates. EURUSD dropped to 1.0130 area, its weakest since Tuesday. Bond yields also slipped on these reports indicating slowdown, which could cut short the ECB’s nascent hiking cycle. The ECB missed its chance to do anything meaningful about inflation. 

Italy heads to the polls on September 25th after Mario Draghi resigned. Italian 10yr bond yields back down a bit this morning to below 3.47%, having leapt above 3.6% yesterday following a) the unfolding turmoil in Rome and b) the market reaction to the ECB’s decision to raise rates. 

The ECB raised its three key interest rates by 50bps, more than expected, albeit there was plenty of chatter about this move. The ECB has abandoned forward guidance and will play it on the hoof from here. The ECB also kind of unveiled its anti-fragmentation tool, called the Transmission Protection Instrument (TPI). I say kind of because there no  real qualitative conditions about when the ECB might deploy. Only a set of criteria for who could be eligible, not a set of conditions for when to use it or how. Purchases are not restricted by any pre-set conditions (purchases are not restricted ex ante) and the scale of TPI purchases “depends on the severity of the risks facing policy transmission”. TPI will be used to “counter unwarranted, disorderly market dynamics” in member states’ bond markets, but there is no clear definition of what this means – how wide does the spread need to get? It will be at the discretion of the Governing Council…the funny thing is the criteria that do exist (compliance with the EU fiscal framework, fiscal sustainability, sound and sensible macroeconomic policies and absence of severe macroeconomic imbalances) could exclude the very countries – like Italy – it is supposed to support.

UK retail sales fell for a second month in a row – signs that the consumer is feeling the heat. Quantity of goods fell 0.1% but consumers spent 1.3% more, highlighting the considerable damage being done to the sector by inflation. 

It’s a mixed start to the session in Europe as the ECB decision and PMIs weigh. The DAX edged a little lower, whilst the FTSE 100 was a tad higher in early trade, both well within recent ranges. US stock markets bounced again, led by a sharp rally for Tesla (likely caused by hedging by dealers). Meanwhile Nasdaq futures are weaker this morning after Snap earnings disappointed and the company became the latest to cut back on hiring – stock dumping 25% in after-hours trade. This had a read across for other social media stocks; Meta –4.7% after hours, Pinterest –6.4% and Twitter was –2.4%, slipping less than peers as marginal earnings impact matters less than the Musk saga. 

Still, it’s been a positive week for equity markets as investors baked in hikes, maybe a slowdown in inflation and earnings that seem to be holding up a little than expected on the whole. The Nasdaq up over 5% this week, the S&P 500 +3.5% and the Dow Jones +2.4%. The FTSE 100 is up 1.5% or so this week and the DAX has added 2.5%. Even the FTSE MIB in Italy is up almost 1% for the week.

Elsewhere, the dollar is on the front foot as the euro pulls back. GBPUSD also weaker as the dollar makes broad gains, DXY to 107. Nat gas is off yesterday’s week high but looks to continue its staircase move higher. Gold hits resistance at $1,720. Meanwhile oil trades lower with WTI at $96 and Brent just under $100.  

Later today sees the US PMI report after Thursday’s Philly Fed manufacturing index showed July factory activity declining for a second straight month. New orders fell to -24.8 and employment also declined.

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