Model Signal Alert

August 23, 2023

A very good morning to everyone. The reversal in risk assets is playing out nicely (so far). I hope my alerts have helped you over the past few trading sessions.

Bonds are bid this morning following the decline in European / UK PMIs, which put growth risks again on alert. Signs of bottoming in Germany's manufacturing PMI and France's services PMI improving provide some relief, though the overall reading is weak. It's all eyes on EZ CPI next week, which will determine September hike is required.

Germany's manufacturing sector may be showing signs of bottoming, though any hope that the service sector might rescue the German economy has now been put into question. Stagflation risks are prevalent in the services industry, as activity has started to shrink while prices have shot up again, even picking up pace. This is a bad sign for the ECB, who may have no choice but to hike once again in September, given persistent inflation.

Meanwhile, France's manufacturing PMI was more resilient than expected, though services saw a third consecutive monthly fall, which was the sharpest in two-and-a-half years.

Source: Bloomberg

UK services PMI is also raising recession alarm bells, dropping into contraction territory. Composite PMI was dragged by weaker services, both now below the 50 threshold. Monetary tightening is taking its effect, August PMI is pushing back on hawkish BoE expectations. Gilt yields are around 12 bps lower across the curve.

Manufacturing PMI drops to 42.5 vs 45 forecast, while services plunge towards 48.7 vs 51 expected, pushing the composite number to 31-month lows at 47.9. BoE might soon be done.

A little reminder of where we stand on Global PMIs. With services now seemingly rolling over, the chatter should swing not towards R* but the other R. The dynamics are clear if you look at the second chart below, indicating a shift towards the bottom left corner.

Source: Haver Analytics

Source: Haver Analytics

Let’s have a look at what the system is flagging overnight.