The dollar is posting gains against most of the emerging market and major currencies. The MSCI Emerging Markets Index is off 1.6% and extending the drop to a sixth consecutive session. Indonesia’s bourse saw the largest decline (~3.75%) in the region. In part, it reflects concern that the rupiah’s weakness (falling now nine of the past 10 sessions) will boost corporate debt servicing costs. 

Another source of pressure on some emerging markets is reflected in the Philippines today. In part reflecting the weakness of the peso, Philippines inflation is rising. The August report released today showed a surged to 6.4% from 5.7% in July. The Bloomberg median forecast was for a 5.9% pace. It has more than doubled since the start of the year and is at nine-year highs. Rising inflation increases the pressure on the central bank to raise interest rates, but as Argentina so aptly demonstrates, rising rates may not be sufficient to stop the currency from falling. 

While the trade tensions were cited for disappointment in the manufacturing PMIs, today’s service PMIs were also mostly disappointing. China’s Caixin’s services PMI eased to 51.5 from 52.8. This was a larger decline than expected.  EMU’s services PMI matched the flash estimate of 54.4 (54.2 in July) though this conceals small downward revisions in Germany (55.0 from the 55.2 flash) and in France (55.4 from 55.7 flash). Spain was an exception. It reported outright albeit small improvement (52.7 from 52.6) contradicting expectations for a decline.

Italy disappointed. The service PMI fell to 52.6 from 54.0. It matches the lowest reading since last October. The manufacturing PMI also disappointed. It appears the economy downshifted over the summer. This coupled with the sharp rise in yields and sell-off in the bank shares may be a warning shot to the new government. The message may not have been lost, as League leader Salvini appears to have softened his rhetoric in recent days. The 10-year yield had approached 3.25% at the end of last week and fell to nearly 2.90% today, the lowest in about a month (August 10). The two-year yield, which was pushing toward 1.50% last week approached 1.0% today.