Japanese PMI’s showed private sector output increasing at the softest rate since May

Markets

Yesterday’s European September PMIs were not bad on a headline level but details were unconvincing. More than anything else, they argue for a prolonged pause in the ECB’s normalization cycle to check how previous easing, coupled with the fiscal initiatives, will be filtering through. The market reaction was testament: no changes in German/European yields and EUR/USD holding steady just north of 1.18. US PMIs are consistent with the economy expanding at a 2.2% annualized rate in Q3 and inflation holding above 2% in the coming months, the survey taker said. But US Treasuries swapped the minor kneejerk losses for gains during Fed chair Powell’s speech, even though it was broadly a repeat of the message from last week’s FOMC policy meeting presser. US yields fell 1.7 to 4.6 bps in a bull flattening move. Other Fed policymakers hit the wires as well. Governor Bowman, for one, said the central bank risks falling behind the curve and said it’s time for the Fed to act decisively (with rate cuts). Others (eg. Bostic) are more worried about inflation. Some (from all sides of the spectrum) said they see benefit in adopting an inflation range rather than a specific target. The Fed, however, just concluded its roughly 5-year strategic review cycle and the 2% inflation target was off limits. Sterling whipsawed on PMIs that were “a litany of worrying news” and closed just shy of the intraday lows around EUR/GBP 0.874. Gilts outperformed vs USTs and Bunds and at the long end of the curve. Stocks ran a bit out of steam near the record highs in the US and near the recent ones in Europe. We’re keen to find out underlying momentum on days like today with little on the economic agenda. That goes for equities but also core bond yields and FX markets. European yields appear stuck near their current levels. Those in the US are trying to find a balance still in the wake of the unusually divisive Fed dot plot of last week. The dollar’s comeback since has stalled again but it doesn’t seem easy for the euro to force a topside break beyond the recent multiyear highs either.

News and views

The Hungarian central bank (MNB) kept its policy rate unchanged at 6.5% yesterday. Hungarian growth was subdued in the first half of the year and a slow economic recovery is expected for the rest of the year. The MNB downwardly revised its 2025 growth forecast to 0.6% while keeping the pace for 2026 and 2027 steady at respectively 2.8% and 3.2%. Hungarian inflation is expected to stay above the central bank’s tolerance band (4%) for the rest of the year before declining persistently in it by early 2026. Compared to the June forecast, on an annual average, inflation may be slightly lower at 4.6% this year and slightly higher at 3.8% in 2026. Inflation is expected to be at 3% target in 2027. The MNB adds that  price stability can be achieved in a sustainable manner by ensuring tight monetary conditions. The latter also helps in preserving financial stability. Upside inflation risks and downside growth risks prevail in coming months, but the MNB sticks with guidance that maintaining a tight policy is warranted. The Hungarian forint sticks to its best levels since mid-2024 at around EUR/HUF 390.

Japanese PMI’s showed private sector output increasing at the softest rate since May this morning. The composite PMI slowed from 52 to 51.1. Trends diverged by sector, with a further strong rise in service sector activity (53 from 53.1) contrasting with a steeper reduction in manufacturing production (48.4 from 49.7). At the composite level, overall new work increased at a slower and only marginal rate, and new export business continued to decline. Employment meanwhile expanded at the weakest rate in two years amid relatively subdued business confidence and historically strong cost pressures. Firms looked to ease pressures on their margins with a further solid increase in selling prices. The latter is a concern for the BoJ who might be in the position to raise its policy rate at the end of October to raise its policy rate from 0.5% to 0.75%

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