Euro Falls on Weak Services PMI Data

STOCK INDEX FUTURES

Stock index futures are higher, regaining some balance after a volatile week as markets brace for corporate earnings. Palantir beat earnings expectations and revealed it had topped $1 billion in revenue. Stocks rose on Monday, recovering from last week’s selloff that was sparked by a string of disappointing economic data and continuing trade uncertainty. President Trump said he would be “substantially raising” tariffs on India as he presses the country to stop buying Russian oil, accusing the country of partly funding the war in Ukraine. Markets will continue to focus on earnings season; AMD and Rivian, are set to report results today, while McDonald’s and Disney are set to report Wednesday. Markets will also monitor the new August 7 deadline for when tariffs go into effect. About two-thirds of the S&P 500 have reported earnings; the index is pacing for earnings growth of 10.3%, up from the 5% expected on June 27.

This week will be relatively quiet on the economic front, with ISM survey data on services sector activity taking most of the attention later today. June trade balance figures showed that exports were little changed while imports continued to fall. Other data due in the coming week are preliminary second-quarter productivity figures and weekly jobless claims on Thursday.

The question in the economy now that tariff levels are mostly set, and that tax cuts are on the horizon is how will economic growth and the labor market recover. Tariffs are likely to put increased pressure on prices, while reduced immigration and government job cuts have the dynamic to weigh on demand. Final sales to consumers and businesses, which carves out government spending, inventories, and international trade, grew just 1.2%, the weakest since late 2022, per data on Wednesday. Additionally, a challenge remains in October, when tens of thousands of federal employees who took voluntary buyouts will be off the government’s payrolls and potentially unemployed.

CURRENCY FUTURES

The USD index is higher, gaining the most against the euro and yen as markets await ISM services data, which should offer some support for the greenback with a good reading. The dollar fell against most major currencies on Monday, as bets on increased rate cuts from the Fed pressured the greenback lower. After Friday’s jobs report and revisions, it is apparent that the labor market is cooling, adding to speculation of additional monetary easing from the Fed past 50 bps.

Euro futures fell lower against the dollar as services PMI data for the eurozone came in just below expectations with a reading of 51.0, below an expected 51.2. Activity in France fell noticeably, with a reading of 48.5 vs. an expected 49.7, signaling that private sector activity contracted further than expected. Meanwhile, services activity picked up in Germany and Spain. Inflation held at 2.0% in July, slightly above the 1.9% forecast, adding to bets that the European Central Bank will hold rates steady for the remainder of the year. Other data due this week will be mostly backward-looking, with manufacturing orders in Germany and Italian industrial production for June due Wednesday, followed by German industrial production on Thursday.

British pound futures are little changed against the dollar ahead of the Bank of England’s policy decision on Thursday, where it is widely expected that the bank cut rates by 25 bps to 4.00%. The BoE remains cautious as inflation is elevated, with CPI inflation being nearly double the bank’s 2% target, but elsewhere there are signs that the UK economy is struggling as the labor market cools. Both services price inflation, which is heavily affected by increased labor costs, and core CPI, which strips out volatile elements – have stayed higher than headline inflation. Purchasing Managers’ Index data for July showed British businesses were raising prices at a “robust pace,” according to S&P Global, which collects the monthly data. Markets will pay close attention to how policymakers vote at its policy decision. While at least five members are expected to back another quarter-point cut, some are expected to vote against a cut of any size, while others are seen voting for a half-point reduction. The three-way split could reinforce expectations that the BoE will stick to its current gradual easing cycle, as it would be the best fit among the decision makers. Any significant changes in how the votes are comprised should draw scrutiny from markets and could signal what the bank will do moving forward. On the data front, the final estimate for services PMI came in at 51.8, above expectations of 51.2, signaling an expansion in activity. The latest RICS house price survey is on Friday.

Japanese yen futures are lower after minutes of its June policy meeting showed a few Bank of Japan board members said the central bank would consider resuming interest rate increases if trade frictions de-escalate. Japanese government bond prices rose as investors looked to cover short positions, even as the auction for the 10-Year JGB was met with weak demand. The Bank of Japan is set to release a summary of opinions from its July meeting on Friday. The release may draw greater market attention, as it could include views on the recently reached US-Japan trade deal. On Wednesday, the central bank plans outright purchases across four sectors of the Japanese government bond market. These operations should provide some support to the local bond market that day. Markets will closely watch the outcome of the 30-year JGB auction amid lingering concerns over potential additional bond issuance to finance economic stimulus measures by a new government, following the ruling coalition’s loss of its Upper House majority in last month’s elections.

Australian dollar futures are little changed as soft local data underscored expectations for a rate cut next week. Data from ANZ and the employment website Indeed showed the Australian job ads fell 1% in July, suggesting the labor market is easing gradually. Household spending rose modestly in June, although spending on services fell for the first month in three. Australia will maintain the 10% baseline tariff rate. The White House attributed this to progress in ongoing trade and security negotiations, noting that Australia is among a group of countries nearing comprehensive agreements. Money markets are pricing in a 100% chance of a rate cut from the Reserve Bank of Australia.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve as the equities continue to bounce back from Friday’s losses, sparking a risk-on sentiment that also sent gold lower.

Treasurys had a choppy trading session on Monday, with bonds ultimately rallying in the wake of the weak payrolls report that pushed the 10-year yield to a one-month low. The policy-sensitive two-year Treasury yield fell to a three-month low of 3.659% on Monday, as traders increased bets on a Fed rate cut in September. Fed Funds contracts show that traders are expecting 75 bps of easing by the end of the year; data from the CME shows markets are pricing a 55.2% chance of the Fed Funds rate being 3.50% – 3.75% by December.

Weaker labor data will continue to pressure the Fed into lowering rates further; the Fed will have an August labor report in its inventory ahead of its meeting in September. If data from the August jobs report continues to paint a picture of a grim labor market, a 50 bp cut from the Fed would not be off the table. However, many states have reported they have been behind in claims processing in recent months as outdated technology issues, decreased staff, funding issues, and backlogs of appeal delays have potentially impacted survey results. Future jobs reports and revisions will continue to garner attention for those reasons and could add to speculation regarding the integrity and accuracy of the data. President Trump fired a top Labor Department official on Friday, while the departure of Fed Governor Adriana Kugler offered Trump the chance to reshape the Fed.

On the supply side, the Treasury will auction $58 billion in three-year notes on Tuesday, $42 billion in 10-year notes on Wednesday, and $25 billion in 30-year bonds on Thursday.

The spread between the two- and 10-year yields fell to 50.9 bps from 53 bps on Monday.

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