Danske Daily: May 23, 2013‏

Euro-area flash PMIs are expected to improve but to remain in recessionary territory. In April, the final euro-area PMIs showed upward revisions pointing to improvement during the month, signaling that data might have improved in May.

Loads of ECB speeches. Liikanen speaks on structural reform and Coeure on a European Banking Union, both in Copenhagen, Nowotny and Noyer hold press conferences, finally topped by Weidmann and Draghi speeches on Thursday.

The U.S. manufacturing PMI is expected to improve slightly, signaling that the US recovery is strengthening.

Fed's Bullard speaks on monetary policy: as with recent Fed speeches, his will be scrutinized for views on a Fed exit from quantitative easing (QE).

Selected market news

An unexpected drop in the Chinese HSBC flash manufacturing PMI to 49.6 (from 50.4) has weighed on stocks in the Asian session and dealt a blow to AUD/USD, but otherwise Bernanke and FOMC minutes have taken centre stage since Wednesday's close.

Although Bernanke's prepared testimony to the Congress on Wednesday afternoon initially seemed to confirm the messages from Fed speeches earlier this week that QE tapering is not imminent, the Fed chairman turned the initial market reaction upside down by saying in the Q&A session that asset purchases could be cut in 'the next few meetings' if data and the economic outlook allow. FOMC minutes released later in the evening confirmed that the Fed is indeed shaping up for an exit sooner rather than later. Most members saw progress in the labor market, albeit noting that eveidence of the economy gaining traction would be needed before scaling back on QE. A number of members would be willing to lower purchases by June provided more evidence of a sustainable recovery had been seen by then. A number of members were worried about low inflation, and said that a further drop could warrant more stimulus.

But overall both Bernanke and the minutes struck a more hawkish tone than both we and the market expected. This sent U.S. equities lower, interest rates and USD higher with the 10Y Treasury yield some 10bp higher above the 2% level and EUR/USD briefly dipping below the 1.2850 level. Given our forecast for the labor market to see continued improvements going forward, it now seems increasingly likely that QE tapering may be announced already at the September (rather than December) meeting. As a result, a sustained move higher in rates and USD may not be far away.

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