EUROZONE DATA: August Flash PMIs: Signs Of Tariffs Reducing Export Volumes
Unsurprising developments the Eurozone-wide August flash PMI following the French and German releases earlier, with manufacturing stronger-than-expected at 50.5 (vs 49.5 cons, 49.8 prior) and services broadly in line at 50.7 (vs 50.8 cons, 51.0 prior). That helped the composite reading rise to a 15-month high of 51.1 (vs 50.9 prior).
- Despite the stronger signals from the manufacturing sector in August, we note the following excerpt suggesting tariffs are having an impact on export volumes: “Growth in total new business was recorded in spite of a further reduction in new export orders (which include intra-Eurozone trade). New business from abroad has decreased continuously on a monthly basis since March 2022, with the latest fall the sharpest in five months”.
The Eurozone ex-France and Germany continues to outperform the two largest economies, but the two blocs are converging towards one another (see charts).
- We estimate the ex-France/Germany manufacturing PMI at 51.2 in August (vs 51.0 prior), with the France/Germany manufacturing composite at 49.9 (vs 48.9 prior).
- In services, the ex-France/Germany measure eased a little to 52.0 (vs 53.2 prior), with the France/Germany composite ticking up to 49.9 (vs 49.7 prior).
- Meanwhile, inflationary pressures appear to be centred in France and Germany.
Key notes from the Eurozone-wide release (focusing on ex-France and Germany):
- “The rest of the Eurozone continued to register increasing output, albeit with the pace of growth easing slightly from July”.
- “Staffing levels increased modestly across the rest of the euro area”.
- “Sharper rises in charges were signalled in Germany and France, but the rest of the Eurozone posted the slowest increase in output prices in the year-to-date”.
- “Confidence dipped in both monitored sectors and across Germany, France and the rest of the Eurozone alike. In fact, French firms expressed a pessimistic outlook for output for the first time in nine months.”
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GILT AUCTION PREVIEW: 1.125% Sep-35 index-linked gilt auction preview
- The DMO will kick off issuance for the week on Tuesday with GBP1.7bln nominal of the 1.125% Sep-35 linker on offer via auction.
- Linkers continue to remain in demand and we have not seen a conventional auction since August 2024 with a bid-to-cover below 3x.
- This on-the-run 10-year linker was launched in January for GBP1.5bln nominal and this will be the fifth auction (matching the auction size seen in June of GBP1.7bln nominal).
- We would expect another strong auction this week.
- The 1.125% Sep-35 linker will be on offer again on 19 August.
OPTIONS: Over $10bln EUR Notional Set to Expire This Week; Could Contain Rallies
- Despite the lack of data and central bank speak set for today, the option expiry pipeline is sizeable today - with a series of large strikes in EUR/USD, USD/JPY and AUD/USD worth monitoring.
- Even with the fade off highs in EUR/USD, the options interest remains lower for the balance of the week. Over $10bln options notional rolls off between 1.1620-65 into the Friday NY cut - the bulk of which expires just after the ECB press conference on Thursday - which could help contain rallies in spot over the week (as has already been the case after the Monday rally).
Full expiry schedule for Tuesday cut here:
- EUR/USD: $1.1550-55($1.6bln), $1.1575-80(E700mln), $1.1620-25(E1.2bln), $1.1650(E797mln), $1.1700(E870mln), $1.1725-30(E958mln)
- USD/JPY: Y146.75($893mln), Y147.00($1.6bln)
- GBP/USD: $1.3385-00(Gbp1.2bln)
- AUD/USD: $0.6475-85(A$508mln), $0.6550(A$566mln)
- USD/CAD: C$1.3620-35($2.7bln), C$1.3710-20($845mln)
JAPAN: Key Rival Launches Criticism Of PM Ahead Of 31 July LDP Meeting
Agriculture, Forestry and Fisheries Minister Shinjiro Koizumi has launched a verbal broadside against Prime Minister Shigeru Ishiba following the governing conservative Liberal Democratic Party (LDP)'s poor performance in the 20 July House of Councillors election. Earlier in the day, Ishiba had said that the LDP remained the "comparatively largest party" despite the loss of seats that saw the governing coalition lose its majority in the upper house.
- Speaking at a press conference, Koizumi said that "From the public's perspective, we don't want to see [Ishiba] proudly showing off that the LDP was the party that won the most seats." He added that the LDP's decline "should be taken seriously", asking, "What do we need to come together and think about to make [a recovery] happen? I said that this is the attitude that is needed now", commments that may be viewed as encouraging a change in leadership without explicitly calling for one.
- Koizumi's comments are notable given his position as one of the most prominent potential challengers for the LDP leadership. In the 2024 contest, he came in third place behind right-winger Sanae Takaichi and the eventual winner, Ishiba.
- Kyodo News notes that LDP lawmakers from both chambers of the National Diet will hold a meeting on 31 July in order to decide on whether to continue supporting Ishiba's leadership. There is little in the way of a formal process of removing a party leader. Instead, a clear signal that the leader has lost the confidence of a significant proportion of party lawmakers is enough to usher them towards the exit door.
