No New Government In Spain And 'Japan-South Korean Relations In Very Severe State'
Danske Markets | Jul 24, 2019 04:34AM ET
Today's main event will be the release of manufacturing and services PMIs out of the euro area. Before the meeting on Thursday, today's euro area PMIs will give ECB some vital insights into how the economy started into Q3 after the weak finish in Q2. A recent setback in global trade volumes and order-inventory leaves us to expect further downside in manufacturing PMIs, which we see falling to 47.2 in July. The lot of the service sector, on the other hand, continues to hold up well, and we see scope for a further small improvement in Services PMI to 53.9 in July as new incoming business remains on an upward trend. That should keep the euro area economy out of recession in the near-term, but for the manufacturing sector the air is getting thinner.
We also get manufacturing and services PMIs out of the US and Japan. US Manufacturing PMI has been falling to the lowest levels in three years (last reading 50.6, consensus 51.0) and a disappointing reading may see markets yet again price in a higher probability of a cut larger than 25bp at the FOMC meeting later this month. Service PMI is also close to three-year lows. We call for a 25bp cut at the July meeting and a total of 75bp worth of Fed cuts this year (July, September and December).
h2 Selected market news /h2In Spain, the first parliamentary vote that would see Pedro Sánchez's PSOE party take government, turned out negatively as only 124 members voted in favour of the proposed government (PSOE has 123 members in parliament) and 170 voted against. There were 52 abstentions, 42 of them from Podemos with the party abstaining altogether. PSOE and Podemos have been negotiating a potential coalition since the election in April but are yet to reach an agreement. Lately, Podemos has accused Sánchez of offering only decorative roles in a potential government. A new vote is set for Thursday where only a simple majority of those MPs who vote is needed. In case of another rejection, Sánchez (or another party leader) has a two-month window to form a government or face new elections.
Japanese PMIs this morning generally surprised positively (although modestly) across both services and manufacturing. Manufacturing PMI came out at 49.6 (49.3 expected) and services at 52.3 (51.9 expected). Markets initially reacted positively, however the flash estimate largely paints a picture of a lacklustre start to the third quarter as goods exports lead the fall in new orders. New export orders have been falling each month since December and the trade war thus continues to weigh heavily on Japanese exports.
Japanese exports could come under renewed pressure as Japan-South Korean relations are now in a very severe state (quote from Japanese chief cabinet secretary Yoshihide Suga). The current dispute between the two countries started last autumn as the South Korean Supreme Court awarded damages to individuals against Japanese companies following Second World War forced labour. Japan has retaliated by imposing restrictions on Japanese exporters' supply of raw materials especially used in South Korea's large semiconductor industry. The South Korean government has previously stated that sanctions would be met by retaliation.
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