Markets: Equities bounce initially as US debt deal draws closer but then turn tail as US ISM report disappoints, global manufacturing PMIs generally weaker. USA: ISM manufacturing falls 4.4pts to 50.9 in July, below mkt.

USA: Construction spending rises 0.2% mom in June, above mkt.

EMU: Final July PMI Manufacturing at 50.4, same as preliminary and at market.

EMU: Unemployment rate unchanged at 9.9% in June, at market.

UK: PMI Manufacturing shrinks 2.3pts to 49.1 in July, below market.

UK: Lloyds business barometer falls 17pts to 19 in July.

ITA: PMI Manuf. up 0.3pt to 50.1 in July, above mkt.

ITA: Prelim unemployment rate down 0.1ppt to 8.0% in June, below market.

ESP: PMI Manuf. falls further 1.7pts to 45.6 in July.

DNK: PMI falls 6.7pts to 55.3 in July, above 50 for the 19th month.

DNK: Retail sales down 0.2%mom/2.2%yoy in June.

SWE: PMI drops further by 2.8pts to 50.1 in July, below market.

BEL: Unemployment rate up 0.1ppt to 7.4% in June.

CHN: Official manufacturing PMI falls 0.2pts to 50.7, HSBC version falls 0.8pts to 49.3.

AUS: AiG performance of manufacturing index falls 9.5pts to 43.4 in July, lowest since June '09.

AUS: TD Sec monthly inflation gauge rises 0.3%mom in July, up 3.2%yoy.

AUS: HiA new home sales fall 8.7%mom in June.

NZL: ANZ export commodity prices fall 0.1% mom in world price terms in July.

THE DAY AHEAD...

USA: Personal Income / Spending (Jun)

EMU: PPI (Jun)

ESP: Unemployment (Jul), Consumer Confidence (Jul)

CHE: Retail Sales (Jun), PMI Manufacturing (Jul)

NOR: PMI (Jul)

JPN: Monetary Base (Jul), Labor Cash Earnings (Jun)

AUS: Building Approvals (Jun), House Price Index (Q2), RBA rate announcement, RBA Commodity Index (Jul)

NZL: QES (Q2), Labour cost index (Q2)

US sideshow almost over, focus returns to bigger issues (Through until early New York time markets celebrated as Congressional leaders and President Obama reported that a deal to raise the US debt ceiling by at least $2.1tn was close at hand. The deal has not yet been done - a vote in the House seems likely in the very late evening New York time with a vote in the Senate occurring Tuesday - but media reporting suggests that there are enough votes from both Democrats and Republicans to make the vote successful. With this sideshow out the way - the US debt ceiling was going to be raised one way or the other - the market is now likely to focus on the bigger issues: the continued deterioration of financing conditions facing the EU peripherals and signs that the global slowdown could prove deeper and/or more prolonged than had been thought.

(Starting with the former, whilst markets have been distracted by the US debt ceiling impasse, financing costs for Spain and Italy have been quietly widening. As a spread against the 10-year Bund, the moves overnight were more disconcerting - Italy out 22bps and Spain out 21bps to surpass their previous wides (see our first chart). The absolute level of yields now stands at 6.00% in Italy and 6.2% in Spain. Markets seem to be worried about both the implementation risks surrounding each countries present fiscal austerity programme and the risk that a weakening global economy will undermine current fiscal targets. It is not difficult to see a negative dynamic developing: a weaker economic outlook deteriorates the fiscal metrics, leading to higher financing costs and calls for more austerity, that in turn weakens the economic outlook. We will be very interested to see how these bonds trade over the next 48 hours or so. (Worries about the global economy have been reinforced over the past 24 hours with a number of horrible looking economic reports. In the US, the manufacturing ISM for July looked much like we expected last month (rather than the positive surprise we received), with the headline index falling to 50.9 and the new orders index falling below the crucial 50 mark to just 49.2 - the lowest reading since June 2009. The latter looks consistent with the reality of US GDP growth over the past six months (see our second chart). In Europe, the flash manufacturing PMI was confirmed at 50.4, down from 52.0 in June. The core countries remain in relatively solid shape but the drop in momentum in both Germany and France is marked (see our third chart). The performance of the peripherals was mixed, with the Italian PMI edging up to 50.1 whereas the Spanish PMI sank to just 45.6. In the UK, we noted the first sub-50 reading (49.1) on the manufacturing PMI since mid 2009, which suggests that industrial production will weaken over coming months (see our final chart). Sharp declines were also recorded in a number of other countries, including Denmark, Sweden and Australia (indeed the Australian PMI fell 9.5pts to just 43.4). We can no longer blame these developments on Japan. We have to hope that this reflects the lags from past commodity price increases and uncertainty created by the European sovereign difficulties and the US debt ceiling debate. But it might also reflect the underlying fiscal tightening that is now taking place across the globe, together with the absence of new monetary stimulus (and in many cases, the withdrawal of stimulus). If so, any rebound in activity over coming months is likely to be muted.

(Looking at the day ahead, the initial focus will remain on the passage of the debt ceiling legislation through Congress. As far as other matters are concerned, first up in New Zealand the employer-based labour market report will shed some light on the jobs market ahead of the more widely followed household-based measure on Thursday. In Australia, whilst there will be some interest in the June building approvals and Q2 house price index, most interest will centre on the outcome of the RBA's latest policy review (my Australian colleagues remain in the consensus expecting no change in policy today, but a handful of commentators are calling for a 25bp hike). In Europe the dataflow is fairly light, so the focus will be on the peripheral markets and how they trade. Finally, the US will report June personal spending and consumption (already implicit in Friday's GDP report) and July auto sales.

Markets

KEY RELEASES

Source: Bloomberg Finance LP

NORTH AMERICA

USA: Manufacturing ISM falls 4.4pts to 50.9, below mkt, lowest since July '09

( On the heels of last week's disappointing GDP data/revisions, the July manufacturing ISM continued the drumbeat of negative news. The headline fell to 50.9 from 55.3 previously, which is the lowest since July 2009 (49.0)-the first month of the economic recovery. (The details of the ISM were broadly weak, as nearly every component declined with the exceptions of new export orders (54.0 vs. 53.5) and import orders (53.5 vs. 51.0)-although these two series are reported in NSA terms, so the month-to-month changes are less instructive. While components such as production (52.3 vs. 54.5), employment (53.5 vs. 59.9), supplier deliveries (50.4 vs. 56.3) were weak; several components fell into outright contraction, including new orders (49.2 vs. 51.6), inventories (49.3 vs. 54.1), customer inventories (44.0 vs. 47.0) and order backlogs (45.0 vs. 49.0).

Without a doubt, this is a disappointing report; and the ISM could break 50 in the near term unless financial market conditions improve.

USA: Construction spending rises 0.2% mom in June, above mkt, May revised up

( Construction spending for the month of June increased +0.2% from the prior period, which was revised up (+0.3% vs. -0.6% previously). The private nonresidential category was the main driver of the increase, (+1.8% vs. +1.2%), while both private nonresidential and public construction declined (-0.3% and -0.7% respectively). The up-tick in nonresidential construction was a mild positive and spending in this category has returned to 2006 levels.

Residential investment remains extremely depressed and running approximately 45% below the average over the past nine years. However, if there was one silver lining within the residential data, single family home construction was up +0.3% in the month - the largest sequential gain since April 2010. Public construction spending is now down -9.6% yoy as fiscal stimulus wanes and budget cuts at the state and local level have taken their toll. Going forward, we are not anticipating any meaningful acceleration in construction activity, at least over the next few quarters.

EUROPE

EMU: Final July PMI Manufacturing at 50.4, same as preliminary and market

( The PMI fell 1.6pts below June's reading of 52.0 and was at the lowest since October '09. New orders declined for the second consecutive month. German manufacturing stalled (at 52.0 from 54.6 in June) with growth hitting a two year low. The French PMI fell to 50.5, just above the expansion mark from 52.5 in June. The PMI index for Italy rose marginally to 50.1 from 49.9 in June, while the Spanish PMI deteriorated further to 45.6 from a reading of 47.3 in June.

EMU: Unemployment rate unchanged at 9.9% in June, at market

UK: PMI Manufacturing shrinks 2.3pts to 49.1 in July, below market

( The headline index of the manufacturing PMI fell for the sixth month in a row, taking it below the 50 no change level for the first time since the middle of 2009. The headline index is now almost thirteen points below its level at the start of this year, and about 2.5 points below its long run average of around 51.3. While output growth is sub-average, the index remains in expansionary territory (albeit only just at 50.6). More worryingly, however, the new orders index has slipped to 47.6, almost five points below its long run average, the fall being the fastest since May '09. These figures are consistent with falling output in the sector, and a weaker euro area in the second half of the year could put pressure on the only part of the survey showing any strength - export orders.

UK: Lloyds business barometer falls 17pts to 19 in July

ITA: Prelim unemployment rate down 0.1ppt to 8.0% in June, below market

DNK: PMI falls 6.7pts to 55.3 in July, above 50 for the 19th month

DNK: Retail sales down 0.2%mom/2.2%yoy in June

( Reduced spending behind clothing items (-0.5%mom/-6.4%yoy) led to the fall.

SWE: PMI drops further by 2.8pts to 50.1 in July, below market

BEL: Unemployment rate up 0.1ppt to 7.4% in June

JAPAN/CHINA

JPN: Vehicle sales drop 27.6%yoy in July

CHN: Official manufacturing PMI falls 0,2pts to 50.7 in July, above mkt

( The sub-index of import prices fell 0.4pts to 56.3. The new orders index rose 0.4pts to 51.1 and the employment index rose 0.3pts to 50.5. The HSBC manufacturing PMI fell 0.8pts to 49.3.

As for outlook, we expect the PMI to begin its modest recovery from August (to 51), and will gradually trend upwards to 53-54 (similar to historical average) by mid-Q4. The key factors that should help improve the PMI outlook in Q4 include: 1) the end of the inventory destocking; 2) the easing of the power shortage; 3) some relaxation in credit, especially for SMEs (note that the State Council is now drafting a new set of policies to support SMEs); 4) the acceleration in public housing construction; and 5) a recovery in auto demand.

AUS COMMENTARY

AiG/PWC performance of manufacturing index slumps 9.5pts to 43.4 in July

TD/MI inflation gauge rises 0.3% mom in July, up 3.2% yoy

HiA new home sales fall 8.7%mom in June

NZ COMMENTARY

ANZ export commodity prices fall 0.1% mom in world price terms in July

( The index was, however 22% higher than a year earlier. Allowing for a stronger NZ Dollar the domestic price fell 3.7%mom but was up 4.7%yoy.

DIARY

AUSTRALIA

Today

RBA cash rate announcement [DB/Market 4.75%; previous 4.75%]

Dwelling approvals (Jun) [DB: 2.0%mom/-10.7%yoy, Mkt 3.0%mom/-10.3%yoy; Previous -7.9%mom/-14.4%yoy]

ABS established house price index (Q2) [DB: -1.5%qoq, Mkt -1.0%qoq/-3.0%yoy; Previous -1.7%qoq/-0.2%yoy]

RBA commodity price index (Jul) [Previous 1.3%mom/28.2%yoy in SDR terms]

Wednesday

International trade in goods and services (Jun) [DB: AUD2.0bn, Mkt AUD2.2bn; Previous AUD2.3bn]

AIG/CBA PSI (Jul) [Previous 48.5]

Retail trade (Jun) [DB: 0.4%mom/2.3%yoy, Mkt 0.4%mom; Previous -0.6%mom/2.2%yoy] Volumes [DB: 0.6%qoq/0.7%yoy, Mkt 0.4%qoq; Previous 0.0%qoq/0.8%yoy]

Thursday

No data

Friday

RBA Statement on Monetary Policy

NEW ZEALAND

Today

Quarterly employment survey (Q2)

[Private Sector Wages: DB 1.0%qoq/2.9%yoy, Mkt 0.8%qoq, Previous 0.3%qoq/2.5%yoy]

[Filled Jobs (nsa): DB 1.1%qoq/-0.5%yoy, Mkt 0.4%qoq, Previous -0.7%qoq/-0.2%yoy]

Labour cost index (Q2)

[Private Sector: DB 0.5%qoq/2.1%yoy, Mkt 0.5%qoq, Previous 0.4%qoq/2.0%yoy]

Wednesday

No data

Thursday

Household labour force survey (Q2)

[Employment: DB 0.0%qoq/2.0%yoy, Mkt 0.0%qoq/2.0%yoy; Previous 1.4%qoq/1.8%yoy

Unemployment rate: DB 6.5%, Mkt 6.5%, Previous 6.6%

Labour force participation rate: DB 68.4%, Mkt 68.4%, Previous 68.7%]

Friday

No data

DIARY