May PMIs Are Key Data Releases Today

Consensus expectation is for an unchanged U.S. ISM manufacturing at 50.7, but we see potential for a slight improvement. If confirmed, this should fuel expectations further of Fed QE reduction this year. San Francisco Fed president John Williams will also be speaking this afternoon. Williams is one of the doves who have recently signaled willingness to consider scaling down QE.

As the euro area PMI flash estimate has already been released (improved to 47.8), the most interesting part of today's release will be the first estimate of manufacturing PMIs in Italy and Spain. We expect to see improvements in both, albeit from still depressed levels.

The U.K. manufacturing PMI is also expected to rise slightly, which would mark the third month of improvement. The Bank of England publishes funding for lending data for Q1. Any signs that the funding for lending programmes have been able to boost banks' corporate lending could ease pressure for additional easing.

In Scandinavia, manufacturing PMIs are expected to have moved back above 50 in both Sweden and Norway.

Selected market news

The official China manufacturing PMI showed an improvement to 50.8 in May but focus is on the divergence to the HSBC manufacturing PMI released this morning, which fell to 49.2, below the neutral 50 level for the first time since October.

Japanese equity markets continue to struggle in high volatility trading. After having lost 6% last week, the Nikkei index is down again significantly this morning - seeing the USD/JPY close to testing the 100 level.

The recent weeks' price action presents the question: is this just noise and profit taking following a six-month rally, or are investors beginning to question the Bank of Japan's ability to deliver? Considering that break-even inflation has also fallen recently, it does appear that the BoJ has lost some credibility in the market, and how it communicates over the coming months will be quite important.

Following two days of gains, U.S. treasuries came under pressure again Friday with the 10-year yield closing at 2.13% - around which it traded overnight. Timing of a reduction in Feds QE remains the dominant market theme, and Friday's employment report should be decisive for the short-term market direction.

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