It could have been a disaster. US faltered yesterday, with the S&P 500 again struggling in the 1945-1950 area, and China's weaker than expected PMIs. However, after initial weakness, Asian shares turned higher. The nearly 0.9% rise allowed the MSCI Asia Pacific Index to close at its best level in five sessions.
European bourses are firmer, led by the 1.2% rise in the German DAX. The Dow Jones Stoxx 600 is up 0.6% near midway through the session. Consumer discretionary, information technology and materials are leading the advance. Financials are lagging. It is the only sector that flat to slightly heavier. The S&P 500 is set to recoup about 2/3 of yesterday's losses at the open.
Core bond yields are slightly firmer in Europe and the US. Of note, Japan sold its first 10-year bond with a negative yield (minus 2.4 bp). The bid-cover edged higher to 3.2 from 3.1.
The US dollar itself is little changed, for the most part. There are two exceptions. The first is the yen. The slightly firm US yields and rising equity prices have lifted the dollar against the yen after Asia initially extended yesterday's decline to almost JPY112.15. The greenback is flirting with the JPY113.20 area. The JPY114.00 area is important. It is the high for the past two sessions and corresponds to the 20-day moving average. The dollar has not traded above this moving average since February 3.
The second exception is sterling. It is the strongest of the majors today, gaining about 0.5%. Sterling's recovery began in the US afternoon yesterday and has continued today, despite the disappointing fall in the manufacturing PMI to nearly a three and a half year low. We note bullish divergence in both the RSI and MACDs, which did not make new lows even though sterling did. We look for sterling to move through the high from the second half of last week at the $1.4030-$1.4045 area.
Sterling's recovery is more evident against the euro. The euro peaked at the end of last week just shy of GBP0.7930. It is trading near GBP0.7760 now. It is below the 20-day moving average (~GBP0.7780) for the first time since February 3. As corrective pressures can carry the euro toward GBP0.7680-GBP0.7700.
The macroeconomic data were mixed. China's official manufacturing and service PMIs were weak, with both slipping. The Lunar New Year celebration dampened the results, but business expectations did rise. We expect that as cleaner data is released, and Chinese stimulus begins working its way through the system, the economy will begin stabilizing. Separately, we note that the PBOC fixed the yuan higher for the first time in six sessions.
While Japanese unemployment rate slipped to 3.2% from 3.3%, household spending fell for the fifth month. The 3.3% year-over-year decline contrasts with consensus expectations for a 2.7% decline. In December spending had fallen 4.4%. Capital expenditures in Q4 were also softer than expected at 8.5% (rather than 8.7%) and down from 11% in Q3.
The Reserve Bank of Australia left rates steady as widely anticipated. The statement was largely the same though the forward guidance was tweaked slightly to suggest that if inflation remains subdued, there would be scope for easier policy. The previous statement said there may be scope for lower rates. Separately, Australia reported a slightly larger currency account deficit in Q4 (A$21.2 vs. expectations for A$20 bln after A$18.8 bln deficit in Q3 15).
The EMU final manufacturing PMI came in at 51.2 from the 51.0 flash. Germany's upward revision to 50.5 from 50.2 appears to have accounted for the improvement. Separately, Germany reported unemployment was steady at 6.2% while the eurozone unemployment rate slipped to 10.3% from 10.4%. The UK manufacturing PMI slipped to 50.8. The consensus expected a 52.3 reading after 52.9 in January. However, sterling had been so beaten up by Brexit fears that corrective pressures are offsetting the disappointment.
There is also some interest in comments from NY Fed President Dudley in China. Dudley is confirming what the market knows. A March rate hike is very unlikely. Dudley expressed less confidence about the inflation outlook, warning that expectations have become unanchored. He also warned that further deterioration in inflation expectations as tracked by the University of Michigan or the Fed's own consumer survey would be worrisome. He warned that the tightening of financial conditions if sustained could lead to a significant downgrade in the Fed's outlook. This points to a change in the dot plots at the mid-March FOMC meeting. The irony here is that measured core inflation (both CPI and the PCE deflator) both rose more than expected in January.
Oil prices are firm. Saudi officials are indicating a willingness to try to stabilize the market. A mid-March meeting between OPEC and non-OPEC members is being planned. We cannot imagine the US participating in any fashion to a freeze or a cut in output. In fact, we suspect, US producers will benefit from any such agreement between OPEC and non-OPEC countries. Specifically, we note that two of the largest US shale producers have indicated they could boost output at $40 a barrel rather than $60 which had previously been the case.
The North American highlights include US manufacturing ISM and auto sales. Canada reports December and Q4 GDP. We think that after a year of slowing, the US manufacturing sector is beginning to stabilize. Canada 's GDP may have edged higher in December, but for the quarter it was likely flat. Higher oil prices may support CAD, but the 2-year interest rate differential is beginning to recover from the slide that began in mid-January.