- U.S. ISM disappoints but details suggest consumer resilient nonetheless.
- Eurozone markets calmed down a little; uncertainty in Cyprus and Italy.
- Focus today on eurozone PMIs and jobs ahead of ECB meeting later in the week. Markets Overnight
PMIs in focus post-Easter time after data released on Monday showed that the US manufacturing ISM staged a marked decline and Chinese ones failed to beat expectations in March.
The U.S. manufacturing ISM fell to a disappointing 51.3 in March (from 54.0). Details of the report were in fact less dismal than the headlines, with notably the employment index higher and indications that the housing and automotive sector are doing well. February data on construction spending revealed that the U.S. property market continues to recover. While the large drop in the headline ISM is a first clear sign that U.S. fiscal issues are taking their toll on both activity and sentiment, it appears however that the U.S. consumer may have in fact been reasonably resilient. This suggests that while a US soft patch is unavoidable, it may not be as profound and prolonged as feared, given recent extensive federal budget cuts.
A few key developments in Europe over the Easter period: In Cyprus, banks opened again last week, and despite strict capital controls now in place withdrawals took place in a relatively orderly fashion. Over the weekend it emerged that large depositors in Bank of Cyprus may face a much higher haircut than initially thought, and that the loss for Laiki depositors may also be larger than first suggested. At the same time however, Cyprus has been given an extra year (out to 2017) to meet budget targets, and may yet re-negotiate. In Italy, Bersani failed to form a government, but Italian president Napolitano has vowed to stay until his mandate runs out mid May, so no new election will be called at this stage. Two groups of mediators have now been formed to come up with government programme proposals. While the situation in the eurozone has calmed down somewhat following the Cypriot bailout, markets could remain nervy – not least if European data continue to come in on the weak side.
In equity markets, U.S. indices closed lower after the weak ISM report. Asian markets are mixed this morning; the Nikkei was dragged down by a stronger JPY. U.S. bond yields ended the day slightly lower with yields down the most in the long end - 3bp on the 30Y. In FX markets, USD lost against all other majors overnight with the JPY in front. The AUD was supported by the Reserve Bank of Australia holding its cash rate target unchanged at 3.00% this morning, as widely expected. Governor Stevens reiterated previous hints that further rate cuts are not imminent. Finally, base metals extended their recent sufferings with notably LME copper hitting a 7M low.
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