The July ISM manufacturing survey was solid, confirming that the economy is at almost zero risk of losing forward momentum. The eurozone, on the other hand, is facing serious headwinds that have all but stopped the economy in its tracks. The market has accepted the fact that a modest tightening of U.S. monetary policy is on the horizon, but pervasive weakness in the eurozone has convinced the market that an ECB tightening is still years away.
The ISM manufacturing index is consistent with overall economic growth of at least 4%, but we are unlikely to see that because other sectors—housing, business investment—are still growing very slowly.
The employment subindex is very encouraging, suggesting that manufacturing firms are becoming more optimistic about the future.
The improvement in the eurozone manufacturing sector that began last year has faded away this year. The U.S. economy is clearly outperforming.
Eurozone swap spreads are still relatively low, which suggests that the underlying monetary fundamentals of the eurozone economy are still relatively healthy. At the very least this suggests that the problem in the eurozone is not due to an overly-tight ECB. It's simply that Europe has too many problems—in particular the fallout from the Russia/Ukraine situation—on its plate and thus future growth is likely to be very slow.
The outperformance of the U.S. economy is being reflected in the equity markets. Since mid-June, the S&P 500 has outperformed the Euro Stoxx index by 6.5%.
The gap between U.S. and eurozone 10-year yields has rarely been wider. This is yet another reflection of the relatively weak outlook for the eurozone economy. U.S. yields are holding at 2.5% despite the near-certainty of the unwinding of QE and higher U.S. short-term interest rates. Eurozone yields are still falling, however, as the market calculates that pervasive economic weakness in the eurozone will keep ECB policy on hold and near zero for a very long time.
2-year sovereign yields tell the same story. They are beginning to rise in the U.S. as the market prices in the expectation the Fed will begin raising short-term interest rates by April or May. But they remain at near-zero in the eurozone as the market cannot yet foresee when the ECB will take similar measures.