Ella 
Yesterday the market initially focused on the Purchasing Managers’ Indexes (PMIs). The sentiment quickly turned strongly risk-averse in the afternoon, although there is no direct link between the two storylines. The decline in the Eurozone PMI from 50.9 to 50.1 suggests that economic activity in the region has almost stagnated at the beginning of the third quarter. This triggered a further inversion/steepening of the Eurozone/German yield curve, even if cost/price pressures remain high. German 2-year bond yields fell by 6.0 bps, while long-term yields rose (30-year yields rose by 2.5 bps). PMIs in the UK (composite PMI rose from 52.3 to 52.7) and the US (composite PMI rose from 54.8 to 55.0) were better than expected, but the Treasury yield market in both countries joined the broader steepening trend.
In the US, poor new home sales were also seen as a sign that restrictive monetary policy is dragging down economic activity, which may force the Fed to cut interest rates soon. US 2-year yields fell by about 3 bps, while 30-year yields rose by 5.8 bps. The market is gradually leaning towards the Fed’s cumulative 75 bps rate cuts this year starting in September. In addition to the data, disappointing earnings reports from some US technology bellwethers further fueled risk aversion. The S&P 500 fell by 2.31%. The Nasdaq fell by 3.64%. In this context, one might expect a stronger dollar, but this was not the case. The dollar index even fell slightly (104.39), mainly due to the strong performance of the yen (USD/JPY closed from 155.6 to 153.89). The poor PMI also did limited damage to EUR/USD (closed at 1.084). It is worth noting that EUR/GBP failed to test 0.8400 again, despite the UK PMI being better than the Eurozone PMI.
Risk aversion also dominated the Asian trading session yesterday (e.g. Nikkei -3.25%). US yields continue to fall. The yen continues to rise sharply. (USD/JPY 152.7). Later today, the German IFO confidence index, the initial US GDP (including price deflator) for the second quarter, the number of US unemployment claims last week and US durable goods orders are in focus. The market expects the annualized probability of GDP growth in the second quarter to be 2.0%, compared with 1.4% in the previous reading.
We even see upside risks to the data. The question remains whether the strong growth data will be enough to change the recent market push for the Fed’s “front-loaded” rate cut. The US 2-year yield is now at risk of breaking the 4.40% support level. The market has been more sensitive to negative than positive news recently. In this regard, weak durable goods order demand and risk aversion are still in play. Regarding the impact of the risk aversion correction on FX, we also focus on the safe-haven battle between the yen and the US dollar. At least for now, the former is still in the lead. EUR/USD is also showing “extraordinary” resilience, with the next support level around 1.08 (50% retracement/early July low).
