- Chinese PMI manufacturing released on Sunday improved unexpectedly from 51.0 to 53.1 while the Japanese Tankan data released this morning surprised on the downside.
- Today’s key releases are European PMI manufacturing and US ISM manufacturing.
Chinese PMI released on Sunday showed a sharp increase in March. The National Bureau of Statistics (NBS) manufacturing PMI improved to 53.1 (consensus 50.8, DB 51.0) from 51.0 in February. This is the fourth month in a row with an improvement and the NBS PMI is at its highest level since March last year. China’s two manufacturing PMIs are currently painting a very different picture of the Chinese economy.
The strong NBS PMI probably exaggerates the strength due to seasonality, but there are also signs that the HSBC PMI currently understates the strength of the economy. The underlying picture appears to be that the Chinese economy hit the bottom in November and growth has since been recovering moderately. We still expect the reserve requirement to be cut at least twice by 50bp, but an interest rate cut looks unlikely at this stage, see China Jump in NBS PMI suggest moderate recovery.
In Japan, the Tankan business survey for Q1 was a slight disappointment. The current conditions for large manufacturers was unchanged at -4 (consensus -4) while the outlook component only improved slightly from -5 to -3 (consensus -2). Tankan shows substantial strength within the non-manufacturing sector with current conditions improving from 4 to 5 and outlook surging from 0 to 5.
The bottom line is that Tankan still suggests that Japan’s GDP growth will rebound in Q1 and the Bank of Japan will not announce additional quantitative easing in the coming months. South Korea’s manufacturing PMI improved to 52.0 in March from 50.7 while Taiwan’s manufacturing PMI improved from 52.7 to 54.7, underscoring that we currently appear to have an improvement in the manufacturing cycle across Asia. The Asian stock indices are trading with no clear direction following the mixed signals in the Asian releases.
The most important outcome of Eurogroup and ECOFIN on Friday and Saturday was the increase in the ceiling of the combined firewall to EUR700bn. The amount comprises EUR500bn from the ESM and EUR200bn already committed under the current EFSF, see statement for more detail. At the end of the meeting on Saturday, the euro area leaders called for the IMF to step up its support. An increase of around EUR500bn is mentioned in several media and could come at a G20 meeting in April. Different options of bail-ins and the use of resolution funds to handle failing banks were also discussed by the European finance ministers and central bank governors, see WSJ.
Spain presented Friday its most severe budget cuts in decades. The EUR27bn fiscal tightening will be achieved through income tax increases, spending cuts in ministries and focus on tax avoiders. The proposed budget cuts awaits parliamentary approval, and are expected to be implemented in May, see Government bonds weekly and WSJ.
Global Daily
Focus today: Following the stronger-than-expected Chinese PMI, focus turns to the ISM index in US. Following a disappointing drop to 52.4 in February, we expect a rebound to 53.4 in March. This would be more in line with the current pace of economic growth in the US of around 2.5-3.0%. There are currently seasonal distortions to the data, though, due to the sharp drop in ISM following the Lehman collapse and this adds uncertainty to the true development in ISM.
In the euro area, final PMI is due, which is expected to be unchanged from the flash estimate. The UK will also release PMI data with consensus looking for a small drop to 50.7 from 51.2. In the euro area, unemployment data will be an unpleasant reminder of the growth crisis. The unemployment rate is expected to rise to 10.8% in February from 10.7% in January. The highest level in the euro era!
Fixed income markets: US bond yields rose significantly late Friday afternoon, after month-end index extension and quarterly bond-stock portfolio re-allocation did not prove as significant as expected. The sell-off in the US added pressure on the Bund future, which moved 50 cents lower into the close. The move higher in yields is likely to have further to go this morning.
First, it is positive that EU leaders reached an agreement in Copenhagen over the weekend to boost the EU firewall against the debt crisis. Second, the unexpected increase in the official Chinese PMI is positive as well. Both factors should support risk sentiment and add pressure on bonds. The ISM will be the main event for the fixed income market today. An increase to 53.4 in March would probably be modestly bearish for the bond market as well.
FX Markets
JPY has been under slight pressure overnight as the Tankan report disappointed the market, fuelling speculation that the Bank of Japan will ease monetary policy further. The general bearish market view on the yen was also reflected in the latest CFTC/IMM data that covers the week ending 27 March.
The data showed that speculators increased their net-long positioning in USD/JPY by 41.8k contracts to 67.6 contracts. Net-long positioning in USD/JPY has now reached the highest level in three years. It indicates that the risk of a correction in USD/JPY is growing even though the higher US yields on Friday add some fundamental support to USD/JPY.
The same is true for the strong Chinese PMI and the European firewall decided on Friday, as both events add to risk sentiment. Today, we expect a rebound in the US ISM. The effect on EUR/USD is in our view uncertain; instead we prefer to play a positive surprise being long cyclical currencies like AUD, NZD and CAD. Not least the two first should also have some support from the better Chinese PMI this morning that everything equal should remove some of the China risk premium currently in the market.
Scandi Daily
DenmarkDanish banks took very little at the 3Y LTRO from the Danish central bank. The estimates had ranged from DKK75bn to DKK100bn, but only DKK18.9bn was taken at the auction – hence much lower than expected. One reason for the low amount could be that there is an auction in September as well, and that most of the government-guaranteed bonds mature in 2013. If we look at the excess liquidity from the mortgage market – this is around DKK150bn – and with the DKK18.9bn in the LTRO, there is around DKK169bn coming to market next week.
A large part of this has already been placed in the Danish mortgage market, and thus we expect excess liquidity to be around DKK50bn, that needs to placed in the market going forward. Thus we still expect to see non-callables as well as floaters continue to perform as we are also getting over the April term, and issuance is expected to decrease.
Norway
In Norway we expect the figures for credit growth (C2) to show that household borrowing is continuing to climb, and that business borrowing has risen in line with the improvement in the growth outlook. All in all, the credit indicator is expected to rise 7.0% y/y in February, up from 6.9% in January. If we are correct, it will add to the picture reflected in last week’s strong numbers that the Norwegian economy accelerated in Q1. We keep our positive view on the NOK and continue to forecast that EUR/NOK will drop to 7.50 over the next three months.