Flash PMIs in Focus as Markets Eye Jackson Hole and Treasury Yield Moves
Key Takeaways
- •European flash PMIs for the euro area and the United Kingdom are expected to decline from the prior month.
- •US flash PMIs are also forecast to edge lower and are unlikely to drive markets unless they deviate sharply.
- •Ongoing tensions involving Iran and the Strait of Hormuz are supporting oil prices and adding inflationary pressure.
- •US breakeven inflation expectations have moved higher, contributing to stronger precious metals and a weaker US dollar.
- •The Federal Reserve is expected to leave rates unchanged in September as investors wait for Jackson Hole and the next NFP and CPI reports.
European Session
The European session brings the flash PMI readings — compiled by S&P Global from monthly surveys of purchasing managers — for the major Eurozone economies and the United Kingdom. These preliminary estimates, the first monthly snapshot of business activity ahead of final figures, are expected to pull back from the prior month's levels across the board, reflecting the ongoing disruption in the Strait of Hormuz — the chokepoint through which roughly a fifth of globally traded oil passes — and the US-Iran stalemate. Readings above 50 signal expansion in business activity; readings below 50 signal contraction.
The data are unlikely to change anything for the respective central banks — the European Central Bank and the Bank of England — however, so the market reaction will probably be muted. Attention is currently centered on the Treasury's "intervention" plan, which is aimed at limiting the surge in long-term yields.
That plan has eased financial conditions at a time when oil prices continue to edge slowly higher. Inflation expectations, tracked through US breakeven rates — the spread between nominal Treasury yields and inflation-protected yields — have shown increased momentum to the upside, which has been the main driver of the surge in precious metals and the selloff in the US dollar.
American Session
The American session features the US flash PMIs, which are also expected to tick a bit lower. Unless the prints show big deviations, the data are unlikely to matter much at this point, as traders await the Jackson Hole speech — the Federal Reserve's closely watched annual symposium, hosted each August by the Federal Reserve Bank of Kansas City in Wyoming — along with the next nonfarm payrolls (NFP) and consumer price index (CPI) reports due in September.
The Bigger Picture
To sum up, a US-Iran stalemate is keeping oil prices supported and adding inflationary pressures. The US Treasury has restricted the tightening in financial conditions, which had been helping to limit the inflation shock. Meanwhile, the Fed is expected to hold rates steady in September and, all else being equal, to support the passive easing in financial conditions for a couple of months more.
The source closes with a caution: if Kevin Warsh, a former Federal Reserve governor, does not address this dynamic in his Jackson Hole speech, precious metals are expected to surge much further.
