What happened overnight
– HSBC China flash PMI falls to 50.1 from 51.1, new orders below 50
– Eurozone mfg PMI falls to 52 from 54.6, new orders below 50
The USD is broadly firmer as softer PMIs in Europe and China add to global growth concerns. The CE3 currencies and the SEK have been the worst performers, while EURUSD has extended its retreat from Wednesday’s 1.4442 highs to lows around 1.4227. Equities were lower in most of Asia, though Shanghai rallied, and European markets are all in the red, with the Euro Stoxx 600 banks index down 1.4%. The S&P future is 0.5% lower. In Europe, Spanish-German 10-year spreads have rewidened by 10bp, nearly back at levels we closed at last Thursday.
The HSBC flash China PMI fell from 51.1 to 50.1 in June, with new orders and employment edging just below 50. As Exhibit 1 on the next page shows, this suggests that the official PMI will fall at least in line with seasonal patterns, if not more. A greater than seasonal fall in the official PMI for June, i.e. more than about one index point, would be bad for risk in general, but particularly negative for the AUD where positioning remains significant.
Eurozone manufacturing PMI declined to 52 in May from 54.6, its lowest since December 2009. The new orders component fell below the 50 threshold level for the first time since July 2009, to 49.6 from 53.3. Exports orders were weak, down to 51.1 from 54. Other components were also soft across the board, employment, prices and stocks all fell in June. The services index recorded its third consecutive fall this month, down to 54.2 from 56.0. The combination of weak services and manufacturing output indices led to another 2 points fall in the composite PMI. At 53.6 it is at its lowest since October 2009 and consistent with euro area growth around 0.4%qoq in Q2.
The data are clearly damaging to our view that global and US momentum indicators will begin turning up heading into the summer months. Our base case remains that the data will turn, but we expect tactical positions geared to weaker data will fare better in the near term. We remain short CADJPY in our recommendations portfolio on the view that US data releases, including durable goods orders this week and the ISM report next week will continue to send negative signals.
We note that the message from the Fed yesterday is that despite recent US economic weakness the Fed plans to end QE2 and is not ready to entertain the possibility of QE3. That implies risk pricing needs to remain skewed significantly to negative outcomes. The Fed is clearly willing to allow a much more significant deterioration in the US economy before it returns to a pro-active monetary stance. (See What to read below).
In European politics, Greece’s opposition leader vowed to vote against the government’s new fiscal austerity measures. That probably will not prevent the budget’s passage, but it will raise concerns that the program will be difficult to implement and potentially unstable. In other news, comments from Chancellor Merkel and the FDP leadership yesterday sounded more conciliatory on the private participation question, noting the need for attractive incentives and Germany’s limited scope for diverging from ECB and broader EU views on the subject.
Singapore CPI inflation was unchanged at 4.5%yoy in May, much higher than the consensus and our forecast for a moderation to 4.1%yoy. A 3.1%mom rise in housing costs was a core driver. The high print for May suggests that the CPI will likely stay above the top of Singapore’s central bank’s (MAS) 3-4% forecast range over the next few months. We expect the MAS to keep the SGD nominal effective exchange rate (NEER) on an appreciating path and would view dips in the NEER towards the mid-point of the policy band as an opportunity to put on SGD longs.
Taiwan industrial output rose to 7.8%yoy in May from a upwardly revised 7.2%. This was above the consensus forecast of 5.9%yoy. While the resilient industrial output should give Taiwan’s central bank (CBC) some comfort, we think it will look at the weak US ISM and Eurozone PMIs with increasing concern. This suggests that the CBC will likely try to keep USDTWD in a range around current levels, and keep volatility low. The central bank is unlikely to welcome rapid TWD appreciation until we see a stabilisation in global growth, in our view.
Fitch has upgraded Philippines credit ratings by one notch to BB+ with a stable outlook. This puts the Philippines in the same bracket as Indonesia and just one notch below investment grade.
What to watch for today
USD: Jobless claims. Our economists expect jobless claims to print 415K this week, roughly in line with last week’s 414K. Over the past few weeks, US data have been disappointing for the most part and we would view market expectations as skewed to the downside. We remain short CADJPY in our cash model portfolio in anticipation of an extended ‘soft patch’ in US data, and as a hedge against our pro-risk positions in AUDUSD and EURUSD.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/06/document-894039241.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS