European PMI slump raises questions over ECB and BoE outlook

• Nvidia earnings to drive AI volatility in tech sector
• European PMI figures collapse, driving currency weakness and stock market gains
• US markets gear up for PMI and earnings-led volatility

European markets are enjoying a strong start to the day, with a raft of weak PMI surveys in Europe raising hopes that the ECB and BoE will hold off on tightening monetary policy further.

US losses yesterday exhibited the ongoing importance of earnings, with retail stocks under pressure thanks to underwhelming Q2 reports from Macy’s (-14%) and Dick’s Sporting Goods (24%). That earnings focus looks to intensify today, with AI-bellwether Nvidia expected to drive sentiment across the board when they report later. Markets are expecting to see a dramatic surge in Artificial Intelligence-related revenues this quarter, with sales of the H100 chip providing a proxy for AI adoption and expansion.

PMI releases look set to dominate as a driver of sentiment today, with releases throughout Asia and Europe providing a theme of service sector weakness thus far. Notable declines for Australian, French, German, eurozone, and UK services PMI readings resulted in substantial contraction figures across the board. While weakness in the services sector provides concern over economic growth, this does provide some hope that the inflationary pressures emerging from the could be dampened if we enter a period of contraction. Unfortunately, while the eurozone services PMI survey dropped off, we are yet to see price pressures abate as wages pushed input costs higher.

The pound has been hit hard after a sharp contraction across both the services and manufacturing sectors. A 31-month low for the composite PMI survey reflects a dramatic decline in economic activity, with the manufacturing PMI of 42.5 coming in at a three-year low. However, the move into contraction for the crucial services sector brings concerns that the UK growth outlook may be on the cusp of deteriorating dramatically. The lag between monetary policy and economic activity has typically brought the expectation that we would soon see signs of distress as a result of higher interest rates. Today’s data highlights the potential for the BoE to finally believe their policy is impacting economic activity, raising hopes that they opt to hold off on further tightening to see how things develop.

Looking ahead, markets will be keeping a close eye out for any replication in PMI weakness from the US, with markets currently expecting to see both manufacturing and services sector surveys move higher. The European experiences seen this morning do raise questions over whether we could similarly see weakness in the US. Nvidia earnings look to dominate tech sentiment, with the likes of Microsoft, Google, Meta, IBM, Oracle, and Amazon particularly expecting to see volatility based on the strength or weakness of Nvidia earnings. Meanwhile, markets gear up for tomorrow’s Jackson Hole Symposium, with Powell’s appearance on Friday providing the main event of note.