More evidence of the European economy slowing in its upward pace was provided by the PMI numbers for August:
Forecast Actual
Manufacturing 54.5 54.2
Services 58.0 57.9
Composite 56.9 57.2 Clearly we are seeing Q2 growth having slowed quite considerably but at current levels still indicate a robust economy, at least before entering the turmoil earlier this month. The uncertainty now lies in how much impact the equity declines and fears of a credit crunch have really impacted the global economy. Note that the PMI’s do not measure confidence but just the levels of activity although the levels of orders prior to the turmoil would tend to suggest to continued growth. However, the risk at this point is that the services sector has been the main driving force behind the economy and thus the damage to the financial services sector does pose significant uncertainties on how much damage has been done. Indeed, the expectations component of the services sector did fall sharply from July to its lowest level in almost 4 ½ years. This now provides the ECB with a nagging headache with the next ECB market policy meeting next week. A source from the ECB has been reported to have stated that the CB will keep its options open at this meeting, requiring the market to normalize to take a decision to hike rates again. There is no doubt that that the policy is still hawkish and another hike is due, but they will not want to risk any further market instability at this point. The U.K. Q2 GDP (second estimate) numbers came in smack on forecast, and unchanged, at +0.8% QoQ and 3.0% YoY. The numbers are strong but the deflator at +3.8% was the highest in over 10 years and points to continued inflationary pressure. It will keep Sterling from declining too much at present with the implied risk of the BOE maintaining a hawkish stance with the chance of further rate hikes. We should remember also that should the market normalize there will be a strong attraction to the carry trades again which will almost certainly benefit the Pound. Over in the States the July Durable Goods Orders saw a surprisingly strong rise of +5.9%, well above the forecasts of +1.0%. There is no doubt that this is a volatile series which is difficult to predict due to the unsteady flow of large capital orders but this number was never-the-less quite strong. Key orders were seen for Boeing, in autos, communications equipment, machinery, metals and military equipment. Excluding transportation, July new orders rose 3.7%. In many ways these also demonstrate that the U.S. economy was recovering well prior to the subprime turmoil and thus there can still be prospects for the economy to recover through to the end of the year. However, we’ll need to see August and September statistics to gain a better view. So then the focus is also on the housing numbers but in July there was a healthy uptick in demand for new homes which rose by +2.8% MoM. This is significantly above forecasts of -1.1%. However, this is still on the back of lower average prices which have dropped around $11K over the past 12 months. Still, the downside risks still threaten to stall any recovery in the economy and until we see numbers suggesting to the contrary the market sentiment will remain bearish and consumers nervous. Last week ended with a stronger than expected decline in the Dollar versus the European currencies while there is growing evidence of the carry trade beginning to dominate Yen movements. The market has opened this morning in Asia in the same mood and may just fuel a slightly deeper move. However, we are approaching some key Dollar supports against the Europeans and how the market reacts will be important. Overall the Dollar has rising cycles through to the end of the year against both Yen and the European currencies. Equally it seems more likely that the Australian Dollar will begin to see a larger sideways consolidation and the implication is for carry trades to be restricted for now but still this does imply a higher Dollar-Yen over the coming months. More later when the analysis is complete. The following economic releases are due today from Asia: None | 
