A string of awful European PMI’s today has the market in a lousy mood and the USD back on top where it belongs. Let’s see if the next couple of days accelerate the move or keep us tied up in range purgatory.
Yesterday’s US ISM Manufacturing data coming in at an oddly strong reading (given the weakening evident in all of the regional surveys for April) touched off a steep rally in risk appetite out of proportion to the import of the news, and out of proportion to the reaction in the short end of the yield curve in the US, as 2-year swaps reacted all of half a basis point to the news.
Overnight, and particularly today in Europe, we got a string of horrific PMI data from the eurozone economy, first with HSBC’s China Manufacturing PMI continuing to show a sub-50 reading, and then with Italy and Spain registering sub-44 Manufacturing PMI’s. Then we had Germany with by far the worst payrolls release since mid-2009 and the overall March eurozone unemployment rate coming in at a heady 10.9%.
The market reacted fairly swiftly to the ugly European data, taking EUR/USD well through the short-term key support at 1.3200/10 and EUR/GBP was down probing close to the 2010 lows. EU peripheral bond spreads were a bit wider, but not alarmingly so.
Chart: EUR/USD
The sickly, grinding rally of late in the EUR/USD has been dealt quite a blow today, but we’re still in the range and we need to see that 1.300 level taken out to get a better indication that there is real directional momentum potential in the pair. The next few days are critical, given the event risks.
ADP
Another downer for the market today was the US April ADP payrolls number, which came in at an anaemic 119k vs. 170k expected and vs. 201k in Mar. That was the lowest reading in 7 months and somewhat confirms the rising jobless claims numbers we have seen in recent weeks. The expectations for the nonfarm payrolls release this Friday must be marching rapidly lower.
Before I get all too bearish on the US employment picture, I would like to see the big surveys showing weaker employment components, something that hasn’t yet happened, but let’s see what tomorrow’s non-manufacturing ISM has to say – the March survey still showed the employment component up at 56.7. Others are arguing that the quality of jobs in this US recovery have been remarkably poor even if the numbers for the payrolls gained over the last several months have looked okay.
Looking Ahead
Two key events tomorrow are the ECB as well as the various world services PMI survey releases. The ECB tomorrow is the main focus, since the market will want to hold off on reacting further to US data until it sees the white of the employment report’s eyes on Friday.
Lately, the ECB has mostly showed signs of wanting to maintain a fairly passive role and only encouraging the idea that it would prefer to use its tools to maintain orderly markets, and that it is up to the politicians to enact the right policies – possibly under a 'growth compact' as Draghi recommended at his most recent speech in front of the European Parliament. This could mean little further help from the money-printing department at the ECB and a deepening recession for Europe’s economies. We also have to remember the split in attitude between the Bundesbank and others at the ECB, which echoes the political debate of the German disciplinarians against the rest of Europe.
But how bearish is this ECB stance for the Euro if it doesn’t mean the ECB is primed for further QE? It’s a bit of a conundrum, but in general, the currency downside due to poor growth as an isolated factor (setting aside the QE angle for a moment) is a bigger risk for the likes of the aussie than it is for the single currency, especially if more of the world’s risk markets begin to look more like Spain’s IBEX stock index, which today recorded new lows below those in 2009 and not seen since 2003.
We noted just yesterday the excessive complacency in this market and wonder if this could be the beginning of a more volatile environment – too early to tell, but the coming few days will offer further clues.
Stay careful out there.
Economic Data Highlights
- China Apr. HSBC Manufacturing PMI out at 49.3 vs. 48.3 in Mar.
- Sweden Apr. Swedbank PMI out at 50.2 vs. 50.5 expected and 50.2 in Mar.
- Spain Apr. Manufacturing PMI out at 43.5 vs. 43.6 expected and 44.5 in Mar.
- Switzerland Apr. Manufacturing PMI out at 46.9 vs. 51.0 expected and 51.1 in Mar.
- Italy Apr. Manufacturing PMI out at 43.8 vs. 47.1 expected and 47.9 in Mar.
- Germany Apr. Unemployment Change out at +19k vs. -10k expected and -13k in Mar.
- Germany Apr. Unemployment Rate out at 6.8% vs. 6.7% expected and 6.8% in Mar.
- Italy Mar. Preliminary Unemployment rate out at 9.8% vs. 9.4% expected and 9.6% in Feb.
- Eurozone Apr. Manufacturing PMI out at 45.9 vs. 46.0 original estimate and vs. 47.7 in Mar.
- UK Apr. Construction PMI out at 55.8 vs. 54.0 expected and 56.7 in Mar.
- UK Mar. Mortgage Approvals out at 49.9k vs. 48.0k expected and 49.0k in Feb.
- Eurozone Mar. Unemployment Rate out at 10.9% as expected and vs. 10.8% in Feb.
- US Apr. ADP Employment Change out at +119k vs. +170k expected and +201k in Mar.
- US Mar. Factory Orders out at -1.5% MoM vs. -1.6% expected and vs. +1.1% in Feb.