Markets
European investors profited from the empty eco calendar and the absence of their US counterparts celebrating Labor Day holiday to start the week/month still in vacay mode. Stock markets eke out small gains (EuroStoxx 50: +0.25%) follow last week’s choppy/corrective action. German Bunds cede some ground with the yield curve bear steepening. Daily changes range between +1.6 bps (2-yr) and +3.3 bps (3.2 bps). The French-OAT swapspread is stable at a high 84 bps with French PM Bayrou acknowledging that the odds are against him at next week’s confidence vote: “compromise is a beautiful thing, but I’m not sure it’s possible”. In that case, little options remain apart from snap elections given that previous attempts to find a compromise PM in charge of a minority government over French hung parliament actually failed with Bayrou the latest victim. The French political crisis overlaps with an institutional one trying to find a way out of the debt spiral the country’s trapped in. Doing so calls for brave and unpopular fiscal austerity measures, but those don’t win you elections. Rising French risk premia are the obvious outcome down the road.
EUR/USD is going nowhere, changing hands just above 1.17. Focus turns to the US side of the equation later this week. While the French political crisis is holding the single currency back, we still see a good chance for the pair to test the YtD top at 1.1829 on an even weaker US dollar. For that to happen, we eye any available update on the health of the US labour market, be it employment components in manufacturing and services ISM’s, the ADP employment report, JOLTS job openings or official payrolls. The amount of potential pitfalls is large with Powell’s dovish pivot at Jackson Hole putting a big target on the labour market’s back. The Fed no longer solely focuses on upside inflation risks, but warns for a potentially rapid deterioration of the job market. The current low unemployment rate is a visage, hiding weakness both in demand and in supply. If companies reaction function switches from labour hoarding to lay-offs, the outcome could be a rapid increase in unemployment (rate). In such scenario, the Fed might be forced to implement more rate cuts and on a faster timeline than currently discounted by US money markets. Loss of interest rate support risks hurting the dollar.
News & Views
The Turkish economy expanded at a way faster clip in Q2 than expected. GDP rose by 1.6% quarter on quarter, more than double the 0.7% seen in Q1 and the 0.6% analyst estimate. Annual growth stood at 4.4% (seasonally and working day adjusted), quickening from 2.6% in Q1. The growth boost came on the account of strong domestic demand, with both household consumption and especially business investment showing strong increases. It suggests the fall-out of the emergency rate hike by the national bank (CBRT) in March which interrupted an ongoing easing cycle had no significant impact. The CBRT meanwhile has returned to lowering the policy rate, with the level currently standing at 43%. Inflation numbers are due on Wednesday and will help shape expectations for the rate decision September 11. The Turkish lira is exploring new (closing) lows against the euro (EUR/TRY 48.2) and sticks to the recent lows seen against the USD (41.11).
S&P Global’s Czech manufacturing PMI surprised to the downside, easing from 49.7 to 49.4 compared to the 50.1 expected. A faster rise in new orders was offset by firms cutting workforce numbers again and prioritizing stock depletion over input buying as a way of lowering costs. Production levels were more or less unchanged after two successive expansions. Logistic issues, delayed deliveries of materials and the impact of US tariff policy weighed on output. Relatively soft input price pressures, thanks to the recent CZK appreciation, boosted business morale though, with confidence at the second-highest level since February 2022. EUR/CZK tested the 24.4 mark for a second time in as many months before returning to opening levels around 24.44.
