Bond yields fall, stocks slide

Weak US manufacturing data yesterday triggered a decline in bond yields and a sell-off in equity markets accompanied by a modest strengthening of the dollar. The dollar’s gains against the euro have been short-lived though – it’s back trading at around $1.1060 this morning – but it remains slightly higher against sterling at about $1.3110, while EURGBP is a touch firmer trading just north of £0.8430.

Government bond yields fell on the back of the economic data, as Fed rate cut expectations firmed, with 10-year yields declining by around 6-7bps. The Nasdaq led a fall in stocks shedding almost 3.5%, its largest daily decline since the turmoil in markets at the beginning of August, while the S&P 500 was off around 2% and European stocks down about 1.2%.

The ISM index of manufacturing activity in the US remained mired in contractionary territory in August amid a sharp decline in new orders, with employment in the sector also declining again albeit at a slower pace than in July. The Atlanta Fed’s latest estimate of GDP in Q3, which  incorporates the latest manufacturing data, shows growth in the overall economy has slowed to around 2% (from 3% in the second quarter as per the official GDP data).

ECB member Simkus says he sees “quite a clear case” for a cut in interest rates in September, but believes another move as soon as the October meeting “is quite unlikely,” suggesting the ECB will continue its cautious approach to lowering rates for now.

Regarding the day ahead, US economic data due include job openings (which will be closely watched), factory orders and the Fed’s latest Beige Book, while we also get final readings for the August services PMIs for the Euro area and the UK.