Reinvestment risk growing, along with the soft landing narrative
PMI Manufacturing and PMI Services data are widely considered to be good gauges of momentum in these two all-important sectors. Today the preliminary July numbers for the UK, France, Germany and the Eurozone were released. Results confirm trends that we have been observing for some months, namely that Services are performing much better than Manufacturing globally, that price pressures appear to be abating along with an easing at the margin in the labour markets, and that overall activity is decelerating. While these trends continue firmly in place it is worth noting that all eight releases, that is PMI Services and Manufacturing data for all four areas aforementioned, were below expectations. Although Q3 is just starting we tend to think that Bloomberg consensus for the Eurozone growth at 0.2% QoQ might be a tad optimistic.
Overall these numbers are still consistent with some kind of a soft landing or, at the very least, are not consistent with a full-fledged hard landing. To be clear, this does not mean that data can’t continue to deteriorate and the global economy winds up going through a harder landing. However, it is fair to say that numbers in the region of what we saw today mean growth is likely to be at zero or marginally above zero in H2 2023. If unemployment projections of only a moderate increase going forward turn out to be true, then Non Performing Loans on banks’ balance sheets will probably not increase by a significant amount and credit should continue to flow into the economy; albeit both demand and supply for it will come down.
From a markets point of view, we think volatility will remain in place while both rates and spreads should trade in a range as we await for more clarity on whether inflation will allow Central Banks to pause and the extent of the slowdown in H2, particularly considering August is looming. Although growth forecasts might be revised downwards for Q3 we expect these revisions to be marginal. With yields still at elevated levels in fixed income, including double digit figures in certain mispriced corners of the market, the cushion to sit and wait on seems quite comfortable.