Circuit Breaker

• The semiconductor-led global stock market sell-off has triggered a flight to safety. The US July JOLTS and Fed Beige Book are today’s data highlights.

• The Bank of Canada is expected to cut rates 25bps to 4.25%. Fade the risk of a jumbo cut.

• Australia real Q2 GDP growth matched consensus supported by the heavy hand of the government.

A flight to safety has gripped financial markets. Global equity markets sold-off led by a plunge in semiconductors stocks. European and US equity futures point to another down day while government bond futures are extending yesterday’s rally. The safe haven CHF and JPY are outperforming.

Brent crude oil prices dropped sharply to the lowest since December 2023 reflecting oversupply concerns. Sluggish Chinese economic activity is also weighing on the broad commodity complex. In August, China’s private Caixin composite PMI remained at a 10-month low at 51.2 while the official composite PMI printed at 50.1 consistent with stagnant growth.

The unimpressive US August manufacturing ISM data amplified yesterday’s slide in stocks and most commodity prices. The downturn in the US manufacturing sector eased less than expected in August. The ISM manufacturing index rose to 47.2 (consensus: 47.5) vs. 46.8 in July. The details were mixed but not enough to reduce fears the Fed was behind the curve and reacting too slowly to soft US economic activity.

The ISM New Orders Index fell 2.8pts to a 14-monht low at 44.6, suggesting demand remains subdued. The ISM Prices Index increased 1.1pts to a three-month high at 54.0 indicative of sticky inflation pressures. Encouragingly, the ISM Employment Index improved 2.6pts to a two-month high at 46.0 but remains in contraction territory.

The US July JOLTS data will offer a clearer picture of the supply/demand balance in the labor market (3:00pm London). Total job openings are expected to dip to 8100k from 8184k in June. Watch-out for the job opening rate (number of job openings/sum of employment and job opening) and layoff rate. In June, the job opening rate remained near pre-pandemic levels at 4.9% and above the 4.5% threshold that typically signals a worrisome rise in the unemployment rate. Meanwhile, the layoff rate dipped to 0.9%, matching the April 2022 low, indicating firms are managing headcount through attrition rather than layoffs. Bottom line: a soft landing in US labor market condition is underway, suggesting Fed funds future rate reduction expectations have gone too far.

The Fed releases its Beige Book report later today (7:00pm London). Attention will be on District contacts view of the labor market. The July Beige Book showed most Districts reported employment was flat or up slightly, while a few Districts reported modest employment growth. Also, look-out to see if more Districts are reporting weaker economic activity. For reference, the July Beige Book noted that a majority of Districts (7) reported some level of increase in activity. However, more Districts (5 vs. 2 previously) reported flat or declining activity than in the prior reporting period.

USD/CAD is consolidating yesterday’s gains. The Bank of Canada (BOC) is expected to cut rates for a third straight time by 25bps to 4.25% (2:45pm London). A press conference is held shortly after (3:30pm London). In July, the BOC delivered a widely anticipated 25bps policy rate cut and signaled more easing was in the pipeline as “ongoing excess supply is lowering inflationary pressures.” The swaps market has more than fully priced-in a 25bps cut and implies a 20% probability of a 50bps cut. We would fade the risk of a jumbo cut and expect a 25bps rate reduction because inflation is tracking the BOC’s Q3 forecast.

EUR/USD has bounced-off recent lows and largely ignored comments from ECB officials. Governing Council member Martins Kazaks pointed out again that “rates have to go lower”, adding “the discussion is only about how quickly and how strongly.” Executive Board member Piero Cipollone warned “there is a real risk that our stance could become too restrictive.” Finally, Governing Council member Gediminas Simkus noted “for the cut in September, I see quite a clear case…For cutting in October or by more than 25 basis points, I find it quite unlikely.” The ECB is widely expected to deliver a 25bps policy rate cut at the September 12 meeting while a follow-up cut in October is 35% priced-in. Eurozone July PPI is up next (9:00am London).

AUD/USD is trading heavy on souring financial market risk sentiment and lower iron ore prices. Australia real GDP growth matched consensus but underlying economic activity is weak. Real GDP grew 0.2% q/q in Q2 from 0.2% in Q1 to be up 1% y/y and in line with the RBA projection. However, the headline was skewed by the heavy hand of the government which added 0.3pts to the quarterly change in GDP. Household consumption, machinery & equipment and non-dwelling construction each detracted -0.1pts from GDP growth. Exports contributed 0.1pts while inventory destocking shaved -0.3pts to growth. Sluggish Australia private domestic demand activity reinforces the case for the RBA to start easing later this year. RBA Governor Michele Bullock will have an opportunity during her speech tomorrow to offer some fresh policy guidance.

National Bank of Poland is expected to keep rates steady at 5.75% (between 1:00 and 2:30pm London). At the last meeting July 3, the central bank kept rates on hold at 5.75%. Governor Glapinski said rates may be cut in 2026 at the earliest, but he has since softened his stance, noting that rate cut talk before 2026 is warranted if the CPI drop is sustainable. However, inflation in Poland is reaccelerating arguing for caution. Headline inflation picked up a tick to 4.3% y/y in August, the highest since December and further above the 1.5-3.5% target range. The swaps market is pricing in 75bps of easing over the next 12 months.