Eurozone CPI data indicate that inflation is resilient. China’s manufacturing data is again disappointing

US economic news on Wednesday was mostly dovish for Fed policy and bearish for the dollar. The August ADP employment figure came in at 177,000, which was weaker than expectations of 195,000 and was the smallest gain in 5 months. Additionally, Q2 GDP was revised downward to 2.1% (q/q) from 2.4%. A bullish factor for the dollar is the unexpected 0.9% m/m rise in July home sales, which was stronger than expectations of a 1.0% m/m decline. Markets rate the odds of a 25 bps rate hike at the September 20 FOMC meeting at 11% and a 25 bps hike at the November 1 FOMC meeting at 49%.

Eurozone economic news on Wednesday was mixed. On the positive side, the Eurozone’s new car starts increased by 15.2% y/y in July to 851,000 units, marking the twelfth consecutive month of growth. In contrast, the Eurozone Economic Confidence Index for August fell by 1.2 to a nearly 3-year low of 93.3, weaker than expectations of 93.5. Spain’s Consumer Price Index for August rose to 2.4% y/y from 2.1% y/y in July, matching expectations. Germany’s Consumer Price Index for August declined to 6.4% y/y from 6.5% y/y in July, worse than expectations of 6.3% y/y. Continued pressure on consumer prices in Germany and Spain drove up European government bond yields and reinforced the euro interest rate differential.

Crude oil and gasoline prices posted moderate gains on Wednesday, with crude oil rising to a 2-week high. Wednesday’s decline in the dollar index to a 2-week low was a favorable factor for energy prices. Oil was also supported after the EIA’s weekly crude inventories data fell more than expected to an 8-month low. The Biden administration is negotiating with Venezuela to temporarily lift US sanctions against the country in exchange for fair elections next year. The lifting of US sanctions will allow crude oil from Venezuela to be exported to the world market, which will increase supply. This is a negative factor for oil quotes. It should also be remembered that September is a seasonally weak month for oil.

Asian markets also traded yesterday without a single dynamic. Japanese Nikkei 225 (JP225) rose by 0.33%, Chinese FTSE China A50 (CHA50) fell by 0.39%, Hong Kong Hang Seng (HK50) decreased by 0.01% on Wednesday, and Australian S&P/ASX 200 (AU200) showed a positive result of 1.21% yesterday.

In Japan, industrial production in July fell by 2.0% from the previous month. The reading was worse than the median market forecast of a 1.4% drop and followed a 2.4% rise in June. The lower output data followed disappointing trade data for July, when Japanese exports contracted for the first time in more than two years. In other data, Japan’s retail sales rose by 6.8% y/y in July. This exceeded the average market forecast of 5.4% growth and marked the 17th consecutive month of growth since March 2022, helped by Japan’s economic and tourism recovery from the COVID-19 pandemic.

China’s manufacturing output contracted for the fifth consecutive month in August, adding to pressure on officials to boost economic growth amid weak demand. The official purchasing managers’ index (PMI) rose to 49.7 from 49.3 in July, remaining below the 50-point level that separates contraction from expansion. The PMI non-manufacturing index, which includes sub-indices of activity in the services and construction sectors, fell to 51.0 from July’s 51.5, dragged down by continued declines in services and construction activity. Economists said rising interest rates and inflation in the United States, Europe, and other major export markets continue to restrain demand for Chinese goods.