Soft UK Manufacturing PMI
The pound was the standout underperformer in the European session as manufacturing PMI fell to a headline reading of 50.5 after a downwardly revised 51.9 (52.1) in April. Most of the components of the report were weak with new orders at the lowest levels since November and exports at the lowest level since May 2009. After the surprisingly soft Q1 GDP print, the PMI readings will be an important focus for the BoE so today’s data may prompt further cautious tones. The more important services indicator is due on Thursday. Last week we lifted our GBP forecasts and with our 3m GBPUSD target now almost reached, we are cautious of further upside from current levels. We continue to expect upside versus the euro however. With much of Europe on vacation, it was an otherwise quiet session – AUD came under pressure after the RBS cut its cash rate by 50bp, surpassing market expectations. A cut had been expected, but the vast majority of economic opinion had been looking for a smaller 25 bp. Even the rates market (which has been habitually over-dovish over the past 9 months) was not dovish enough for today’s meeting, and only 34 bp of easing was priced in ahead of the actual decision. AUDUSD dropped 80 pips and still looks heavy. The decision itself is unusual historically – although the bank has cut in increments of more than 25 bp before, this has usually been in response to external shocks. For example, the cash rate was lowered by 100 bp in Feb 2009 during the depths of the global financial crisis. Although we will have to wait until Friday’s quarterly Statement of Monetary Policy to see the full rationale, today’s policy statement pointed again to the likelihood of “below trend” growth, but stressed that there was no evidence that a “deep downturn” is occurring. In response, our Australia economics team have changed their RBA call – they now think the RBA will cut again in August taking the cash rate to 3.5% by year end (and not 3.75% as originally forecast). Elsewhere, Japanese officials have raised their rhetoric in response to USDJPY falling through 80.00, describing the move as “somewhat rapid”. Special attention was paid to the risk that speculators might take advantage of thin holiday markets to push the yen higher. Otherwise, on Tuesday manufacturing ISM is the key data point and we are slightly above consensus in looking for a 53.5 release, while BoC’s Carney will likely continue his assertive views on the Canadian economy.
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