While all eyes are on the US-China trade negotiations the US Trade Representative office yesterday published a further list of $4bln of European goods targeted for tariffs, adding to the list of $21bln announced in April. This is due to the long-running Airbus-Boeing dispute; however European producers of cherries, meat, cheese, olives, pasta and some types of whiskey are probably a little confused as to how they got dragged into the argument over aeroplane subsidies.
News like this just keeps adding to the downside risks that are becoming more apparent across the globe with no respite apart from the occasional fragile trade truce as seen at the G20. To confirm this, the mass of Purchasing Managers Index (PMI) reports yesterday gave a stark reminder of how all the trade frictions affect the outlook. Out of the 35 PMI releases yesterday only 7 were positive between May and June; this equates to 18 countries now have a score below the 50 level which is widely thought of as the boom or bust line, indeed if you look at G7 + Russia only two countries are in positive territory out of the eight with the US one of the two.
The PMI data is a survey which is sent out to senior executives asking about the prevailing direction of economic trends in manufacturing and the service sectors. The surveys ask whether the market conditions they are experiencing are expanding, staying the same or contracting and so the results can swing around with a change in sentiment but it is a very good indicator of the current outlook given today’s situation.
This could help explain the lower yields across the globe as the outlook does not look good for continued growth especially if the US and China suddenly catch a cold.
The Italian sovereign bond market is the star performer this morning as the populist government has lowered its budget deficit, you can now lend to Italy for ten years at … wait for it…. 1.87%, and if you wanted to just lend for a 2 year term you get to pay towards their budget with negative yields. Italy’s Manufacturing PMI yesterday was 48.4, a drop from 49.7 in May, you see it works, PMI me up.