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Weekly Focus – Signs of Global Peak in Manufacturing?

Risk sentiment was generally positive this week, as inflation fears continue to fade although the spread of the delta variant of Covid-19 has increased worries of new outbreaks. The reflation trade continued to lose steam, as tech stocks lead the gains in equities while broad USD appreciated. In line with our view, early signs of peak in the global manufacturing cycle are starting to emerge (see Research Global – Manufacturing cycle to peak in Q3, 21 June). Chinese Manufacturing PMIs fell short of expectations with the new export orders declining, signalling lower foreign demand. Manufacturing PMIs of Taiwan, which typically are strongly correlated with the global PMI, also fell notably, even if new local lockdowns could have had a slight effect on the indices. Importantly, price pressures seem to have peaked, and order backlog growth appears to be fading.

In line with expectations, Riksbank maintained their dovish tone in the July meeting. While both growth and inflation forecasts were revised higher, the rate path still signals no rate changes until Q3 2024. See Flash Comment Riksbank – Confirms a soft stance, 1 July.

Euro Area June Flash Inflation was a disappointment for ECB’s inflation hawks. The decline in headline HICP (1.92%; May 1.98%) was driven by both lower contribution from energy prices as well as lower core inflation (0.91%; May 0.95%). The decline in core HICP appears to be related to a drop in German package tours, while rise in NEIG prices compensated for part of the fall. We still expect Euro Area inflation to pressure to remain moderate, read more in Research Euro Area – Mind the inflation gap, 8 June.

First full week of July will be quiet in terms of economic data. Both US ISM and China’s Caixin Services PMIs are due for release. Markets will also closely inspect the minutes of Fed’s June meeting for any hints of the upcoming tapering discussions.

Over the summer holiday period, we continue to monitor developments in the US jobs market. We expect labor market gains to pick up over the coming months which could be a catalyst for the Fed to turn even more hawkish. While US ISM Manufacturing PMI remained at elevated levels this week, we do expect to see further signs of a peak in the manufacturing cycle also in the US. At the same time, we will follow if market’s inflation fears continue to abate.

On the virus front, the delta variant is likely to continue spreading over the coming weeks, but this should be manageable in the advanced economies as a result of the relatively good vaccination coverage. The situation remains difficult in developing economies, though.

ECB’s July meeting should not be a game-changer, as the ‘significantly higher’ PEPP purchase pace has already been confirmed for Q3. Instead, we will focus on how optimistic QC members appear in terms of the ongoing recovery and the inflation outlook. Hints about ECB’s strategy review are likely to become more frequent towards the end of summer. The European Commission is expected to release proposals on a range of legislative measures aimed at achieving its climate target of reducing CO2 emissions by 55% by 2023 in July. Markets look out for the suggested carbon border adjustment mechanism (CBAM) on imports and expanded emissions trading scheme (ETS) for sectors such as cars and heating.

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