Business Barometer slips in July

OVERNIGHT

Asia-Pacific equity markets are mixed this morning. China’s Caixin manufacturing PMI unexpectedly fell below the 50 contraction level in July reinforcing the message that the economy’s rebound is faltering. The Australian central bank left interest rates unchanged at 4.10% for the second update in a row. It warned that rates may still need to rise further but its economic commentary nevertheless reinforced expectations that they may have peaked.

THE DAY AHEAD

The July Business Barometer, released earlier this morning, showed business confidence down by 6 points from June’s 13-month high. That still left it above the long-average. Firms were actually more optimistic about their own trading prospects but sentiment about the wider economy fell to a 5-month low. That may reflect the increase in the share of companies reporting rising interest rates as their biggest concern. Hiring intentions remained positive but cooled this month, while wage growth expectations were little changed and still elevated. Own price expectations, however, fell to their lowest in nearly a year.

The rest of today’s economics calendar is dominated by July manufacturing PMI updates. In the case of both the Eurozone and the UK these are second readings that are not expected to be revised from the first estimates. Those showed further slides in manufacturing activity in both economies. In the Eurozone the output index fell to a 38-month low, while in the UK it hit a 7-month low. The declines seemed to reflect both weaker demand and previous overstocking. However, more positively inflationary pressures in the sector continue to ease. 

In the US, the first reading for the July PMI manufacturing index - while still below the 50 expansion level - picked up to a 3-month high and the output index printed at a 2-month high. US industry is not immune to the headwinds that are plaguing the sector globally. However, there have been some tentative signs that the new ‘green’ incentives offered by the government are helping to lift demand for capital goods. That offers hope that activity in the sector may be bottoming out but nevertheless we still expect the ISM manufacturing index for July to also still be below the 50 expansion level.  

Other readings for the US economy today will come from construction spending and the job market turnover report from July. Construction, particularly housing, has been impacted by higher rates but there have been tentative signs of late that activity is rolling over and we look for another rise in this series. The job turnover data will provide insight on labour market conditions but the key report on this will be Friday’s payrolls report for July. 

MARKETS

Global bond yield changes were mixed yesterday but moves were modest as further news on the interest rate outlook is awaited. In currency markets, sterling rose modestly against the euro but fell against a generally stronger US dollar.