Ok, let’s see…
It’s Tuesday and there’s some European PMI data you should note. Because nothing says “exciting” and/or “interesting” like a sentence that includes the words “Tuesday,” “European,” and “PMIs.”
Long story short, Markit’s April manufacturing PMI shows euroarea factories expanded output at the fastest pace in six years:
That’s just a touch lighter than the flash reading. Here’s the summary:
- Index rises to 56.7 from 56.2 in March; Year ago 51.7
- Highest reading since April 2011
- New Orders rise to 57.7 vs 57.1 in March
- Highest reading since March 2011
“Companies are benefiting from the historically weak euro, improved growth in key export markets, rising domestic demand and ongoing central-bank stimulus including record-low interest rates,” Chris Williamson, Markit’s chief economist said, adding that “optimism about the year ahead, meanwhile, appears unaffected by political worries.”
Meanwhile, the UK print was a blowout. The CIPS and Markit UK PMI for April came in at 57.3 vs. 54.2 in March and against consensus of 54.
The forecast range was from 53.5 to 55 based on 31 estimates. It was the highest reading since April 2014 and the ninth straight month of expansion. New orders jumped to 60.7, the highest since the start of 2014. That led directly to this:
We also got the RBA, which left the cash rate unchanged as expected. And that was fine for the aussie until it wasn’t:
Apparently, the early strength was short-term investors, spot dealers, macro funds and companies (so, “everybody”, I guess) betting on further gains, but then we got what looks like profit-taking at 0.7556-ish. “The RBA’s post-meeting statement is a touch more optimistic than last month,” Joseph Capurso, an FX strategist at CBA in Sydney remarked. “This partly underpins our more optimistic view for Aussie dollar.”
Whatever. Moving on, USDJPY hit 112 for the first time since late March. That’s definitely notable as it underscores the extent to which “risk-on” is the prevailing mood. Eventually we crossed 112.20, the highest since March 21:
That weighed on Treasurys where flows were light as Japan is on holiday.
WTI tried to recover from its lowest close in a month ahead of API data out this afternoon and EIA tomorrow morning. Brent rose as well, heading towards $52/bbl. “Rising oil-product stockpiles in the U.S. may simply mean that refineries are building up supplies prior to the OPEC- led group’s extension of output cuts, but the market’s still concerned because they are abnormally expanding,” Hong Sung Ki, commodities analyst at Samsung Futures told Bloomberg Tuesday morning.
Here’s SocGen’s overnight take:
The final few days of the French election campaign may see nervousness, notably about turnout, and a growing focus on what happens afterwards with a President who will not come, whatever happens, from one of the two establishment parties. But opinion polls haven’t really wavered much and Oddschecker.com still puts Emmanuel Macron’s chances of winning at just under 90%. If those odds are reflected in markets, the Euro should have a reasonable week and Euro proxies (SEK, PLN, HUF etc) a better one. In a risk-friendly, low yield environment globally, EUR/USD is edging towards 1.10 and we really wouldn’t rule out a spike to the top of the last two years’ range at 1.17 at some point in the coming months. EUR/JPY is likewise grinding higher and we expect to see 130 in due course. And perhaps the pick of the bunch in the long run can be SEK/JPY.
Yesterday’s underwhelming US ISM data match softer Chinese PMIS but so far, the response is not meaningful fear of slower growth. Rather, the Chinese data are seen as signaling the end of a growth spurt, and the US data were deemed less important by the Treasury market than Steve Mnuchin’s positive comments about the US issuing 50year bonds. After Q1’s soft GDP outcome, the Atlanta Fed Nowcast is 4.3% for Q2. We’ve got an FOMC meeting tomorrow and then the labour market data on Friday so we’ll see if that changes anything, but by and large, tepid economic data just reinforces the sense that monetary policy will remain incredibly accommodative, not just in the US but globally. That, in turn, just underpins the case for carry-hunting. Vol is low (Deutsche bank’s CVIX FX vol index is back at 2014 levels), correlation high, risk assets OK. President Trump said he’d be honoured to meet Kim Jing Un if the circumstances were right, and that was good enough for Asian currencies to have a bullish session. Any excuse will do for a carry-party.
In a carry-happy world, the yen remains a short of choice. The other currency which is having a difficult start to the week is the pound, with the revelations about last week’s Downing Street dinner dampening spirits. There are too many shorts for the pound to get really hit, but I’ll be watching out for the PMI data this morning. We expect a fall to 523.9 from 54.2.
The RBA left rates on hold and delivered a very ‘wait and see’ statement. AUD/USD is still tracing a bottoming-out patter, but supertankers have a tighter turning circle. AUD/USD, AUD/JPY and AUD/NZD will all be higher in a year or two but the paint will have dried on many walls in the process.