NASDAQ weak, Oil rallies

A raft of weaker economic data raised global recession fears with worsening US factory orders, downward revisions to Eurozone survey data, and slowing service sector data out of China. The tech heavy NASDAQ fell back. An inverted yield curve has been hinting at recession, or the R-word, for some time. Friday’s US payroll data will be closely watched for signs of slowing growth. Oil was the standout asset on news of further production cuts by key OPEC+ members.

Bottom-line: Risk-off.

TODAY’S MAJOR NEWS

What chances recession?

The US manufacturing sector continues to struggle. Although today's weak US factory orders missed the mark, it shouldn't be too much of a surprise to see confirmation of the weakening demand conditions that have been emerging on recent manufacturing PMI measures, showing the growing cracks in the sector amid further interest rate increases. Chinese manufacturing and services demand is also weakening.

Economic conditions in Europe continue to soften, with today’s Eurozone Purchasing Managers Index (PMI) pointing to a manufacturing recession. The real source of concern continues to be the softening European service sector, which had largely been offsetting the negativity in manufacturing. This marks a return to contractionary territory for the Eurozone manufacturing, after what appeared to be a rebound from an ugly second half of 2022, with Eurozone services heading the same way.

Fed minutes point to two more rate hikes

Fed officials skipped a raise at the June meeting in order to better judge the impact of ten straight rate hikes and a five percentage points increase, according to minutes released today. All but two of the 18 participants expected that at least one hike would be appropriate this year, but 12 expected two or more. Investors are betting on a next interest hike this month, with surveys indicating an 83% chance for a 25-basis-point increase later in July. The trade is less confident of the second hike, with a 32% chance is seen for that rate rise in October.

“The participants favoring a 25 basis point increase noted that the labor market remained very tight, momentum in economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the Committee’s two percent objective over time,” the minutes said. Friday’s Non Farm Payroll data for June will be closely watched for any reduction after 300,000-plus average gains for the past several months, with forecasters estimating 240,000 jobs added, and any change in the historically low 3.7% unemployment rate.

Tech trade war heats up

The technology battle between the US and China is warming up, with China announcing export restrictions on rare earth metals Gallium and Geranium, key components in the tech and defense sectors starting August 1, raising concern that further Chinese supplies could be restricted. These moves are in direct response to US measures restricting China's access to some high-tech chips and recent news stories which suggest that Chinese access to US-based cloud storage services could also be limited.

Tensions between the world's two largest economies continue to simmer despite the recent diplomatic efforts, and the tech sector looks to be one of the main points of escalation. The move comes before US Treasury Secretary Janet Yellen is scheduled to arrive in Beijing tomorrow for more high-level talks after Secretary of State Antony Blinken's recent visit, both trying to build diplomatic bridges and avert commercial or military conflict.

Factory orders weaker than expected

• US factory orders missed expectations in May, up 0.3% month-on-month, versus an expected 0.8% increase
• New orders for durable goods rose 1.8% month-on-month
• Orders for nondurable goods fell 1.2% month-on-month
• Transportation is the main growth driver, with orders rising by 3.8% month-on-month – with strong orders for civilian aircraft and ships
• Ex transportation, new orders for US manufactured goods fell by 0.5% from the month prior, well below expectations and marking the fourth consecutive month of decline

Eurozone Purchasing Managers Index (PMI) shows softer economic conditions

• Today's Eurozone Composite PMI final reading for June was revised down to 49.9 from its preliminary 50.3 a couple weeks ago – indicating a manufacturing recession
• The Services PMI for June was revised down to 52.0 from the preliminary 52.4, and the 55.1 seen in May
• One positive note from today's numbers was an easing of price pressures on both the input and output side, meaning the ECB's aggressive rate hikes appear to be having the desired effect in combatting inflation

TODAY’S MAJOR MARKETS

Equity markets

• Markets weakened in morning trade, with Nasdaq and the S&P 500 both off 0.3%, while the more broadly-based Russell 2000 down 0.9%
• Global markets also continue to be un-inspired, with the FTSE 100 and DAX off 1.0% and 0.6%, respectively, while the Nikkei 225 was down 0.3%
• The VIX, Wall Street’s fear index, rose to 14.1

Currencies and Bonds

• The dollar index rose 0.2% against a basket of currencies to 103.3
• The Euro/dollar cross-rate fell by 0.2% and Sterling/dollar was flat
• Bond yields rose sharply, with yields on 2- and 10-year Treasuries up to 4.93% and 3.91% respectively – heading back to highs seen last fall when inflation was a major problem

Commodities

• Gold prices were off 0.1% at $1,927 per ounce
• Crude oil prices rose 3.3% to $72.1 per barrel, spurred by recent news of production cuts from Saudi Arabia and Russia
• Agricultural commodities were largely mixed, with the wheat complex showing strength while the rest of the sector remains in the red

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]