Flash PMI’s for September 2020 around the world add more evidence to the possibility of a global slowdown during the economy’s all-important rebound quarter. Q2 was the big downturn, and so it always going to be Q3 where the bounce back would be sharpest. While that has definitely been the case, concerns are mounting for what might follow in Q4.

As we’ve seen elsewhere, in too many places, July. It showed up in Europe again; yesterday IHS Markit reporting a sharply lower composite PMI for its flash September estimate. While manufacturing continues to only modestly accelerate, the service sector index has fallen back to just 47.6, below 50 again therefore renewing/adding to uncertainty over the upward trajectory.

The peak in Europe according to Markit’s estimates? July.

The US seems to have fared comparatively better, nothing new, but after accelerating in August the flash estimate (composite) for September slipped. Again, the service index is to blame. Still near last month’s multi-year high, as with all these PMI’s we can’t help but wonder why it isn’t so much higher? That’s really the concern about Q4.

The third quarter, again, rebound and reopening momentum. That has to carry over into Q4 but even the highest of these sentiment surveys keep coming up way short. Add to that the possibility of this late summer setback, a growing one, and it’s no wonder markets seem to have become a little more angst-ridden of late.

As my colleague Joe Calhoun noted yesterday, that begins with how the US$ seems to have caught a bid after being declared dead and buried all summer. It had been falling against most currencies, notably the euro (and pound). However, despite crash hysterics, the exchange rate had remained substantially above its pre-GFC2 levels. Suspicion already that things may not have been as flood-like as had been reported.

The dollar’s bid dates back first to India’s rupee (our 2018 canary) which topped out most recently coinciding with Jay Powell’s huge Jackson Hole dud. The psychological buildup and inflationary hype preceding the unveiling of the “new” average inflation target seems to have instead produced thus far a small backlash instead (including stocks).

While officials have tried (in vain) to sell it as something new, it’s no different than the prior symmetrical inflation target which had already been the same as forward guidance dating back to the early part of the last decade. Even those not who don’t closely follow the Fed, it was truly underwhelming.

The Fed disappointment, therefore, balancing even more of everything in the same potential post-July direction.

But for the first half of September, the leadup to the mid-month seasonal funding bottleneck, only gentle countermoves against the rebound trend. All that seems to have changed, at least in the short run, in the second half right around September 17.

Notably, for the first time in months, CNY has come back down (CNY DOWN =/= GOOD). While nothing overly concerning, it requires vigilance given what it potentially represents for what we already observe coincident to this potential inflection in other crosses where the dollar is once again on a bid (eurodollar tightness).

With our modest suspicions raised, the next step is to figure out what could be behind the change. Already, we’re looking at repo collateral; because we’ve never stopped looking at repo collateral.

That means, of course, bills. Treasury bill yields have likewise caught something of a modest bid again, with equivalent yields all across the front end of the curve falling a few basis points at each tenor. No red flags, no big warnings; just a consistent kind of reversal suggesting the possibility of some renewed tightening coming from this key area.

While we are thinking bills, collateral, and bottlenecks, that next leads our attention toward credit spreads; junk corporates in particular (in lieu of a reliable, broad measure of Eurobond corporate spreads). Once more, like everything above, consistency.

Credit spreads are up modestly again, having already plateaued somewhat around late July. But, as we’ve pointed out before, beginning here from already-elevated levels. Currently, the increase is likewise modest and has thus far been limited only to the highest risk sectors of junk.

What that adds up to is perhaps the first real eurodollar/global dollar challenge to the reopening/rebound trend. I won’t call it reflation because I think it has a ways to go before qualifying, which means even further before something close to a recovery.

These indications pointing toward funding tightness do span across a pretty broad cross section of market prices, though, again, still only small moves. If there is one thing that is consistent with tightening but kind of getting a little more bent out of shape, potentially hinting at something more substantial, in addition to CNY’s potential, that would have to be gold.

Gold has been just pummeled recently – and that further raises the stakes in terms of collateral.

The top in bullion coincided with the last drop in yields, so no real issue there. However, the most recent fall in its price has taken place without much change in UST rates; in fact, minor decrease in them. Either gold investors are expecting the next move to be slightly higher for yields – not likely given what we’ve already noted in eurodollar tightening – or the more serious downward push in bullion prices is being connected in the shadows with what we may be seeing in risky credit spreads and T-bills.

Collateral. Again.

To reiterate: July economic concerns continue, first real challenge in dollar tightening since June, with several key indications being folded into that negative mix. None of these things are alarming or even really concerning at this point, but they are worth paying very close attention to as September, and Q3, heads toward its conclusion.