Weak European PMI weigh on sentiment
What happened overnight
– Italian and Spanish PMI deteriorate in April, driving euro area PMI lower
– Norway PMI falls 4 points, Swedish PMI moves sideways
– Swiss PMI declines back below 50, lowest since November 2011
EURUSD fell back below 1.3200 in response to the weak PMI data, in Spain and Italy as well as in the non-EU periphery. The USD is stronger across the board, with PLN and NOK as the weakest performers on the day, reflecting the weak data surprise. With the exception of the euro, price action in G10 currencies has been limited to small ranges for the most part. Equities are also showing a relatively muted response to the data, and peripheral sovereign debt markets are softer but do not display signs of panic. AUDUSD is a touch softer at 1.0332 and USDJPY continues to move lower to 80.30.
The data surprise moves the spotlight onto the ECB decision tomorrow. Euro zone PMI was revised lower to 45.9 from 46.0 in April. With manufacturing PMIs at 46.2 and 46.9 in Germany and France respectively, the euro zone core looks increasingly weak. The European periphery faired even worse, with a 4 point drop in Italy and poor readings in Spain, Greece and Ireland. While the Irish PMI remained a touch above 50, in the rest of the periphery PMIs in the low 40s suggest a fairly difficult growth outlook. The PMIs highlight the growth risk for the euro zone as well as the vulnerability of fiscal targets in the periphery, in our view. This should bias ECB on the dovish side, likely driving market expectations that the ECB might deliver a surprise cut at tomorrow’s meeting.
In Switzerland, PMI fell sharply to 46.9 from 51.1 previously. Growth risk is likely to intensify deflationary pressure, reinforcing the SNB’s commitment to the 1.20 EURCHF floor, in our view. In Sweden, the PMI was flat on the month at 50.2, slightly below consensus for 50.5. While for now the PMI has held up relatively well in Sweden, we think the SEK remains vulnerable to any setback in German growth or re-intensification of sovereign stress in the euro area. Norwegian PMI gave back some of the previous outsized gains, but remained relatively strong at 53.7.
PMIs fell below the 50 mark in the CE3, in line with the euro zone data. We expect the growth outlook to deteriorate further in countries geared to Europe and our preferred expression of this view is short positioning in the Polish zloty. The weaker growth outlook implied by the latest set of PMI numbers suggests that priced in expectations of a rate hike are likely to be unwound, in our view, The large current account deficit remains a threat to PLN, exposing the currency to swings in global risk appetite. We maintain a USDPLN topside seagull position in our derivatives recommended portfolio.
UK money data was slightly stronger than expected. Mortgage approvals increased 49.9k, above consensus for 48.0k. M4 ex intermediate OFC rose 0.5%mom, after falling 0.4%mom in February. The data are unlikely to have a material impact on the next MPC decisions. Meanwhile, Bank of England data showed foreigners were net sellers of gilts in March. The net sales amounted to £1.7bn following sales of £4.7bn in February. However, we expect renewed stress in the euro zone to improve reserve manager demand for gilts and keep GBP well supported vs. EUR.
ANZ’s New Zealand commodity price index fell 4.5% in April, following a 1.7% drop in March, led by a sharp fall in dairy and meat prices over the month. The biweekly Fonterra auctions overnight also saw whole milk prices decline to the lowest levels since mid-2010. The combination of weak commodity prices but resilient NZD underscores the RBNZ’s concerns and should keep the central bank firmly on its dovish footing.
Asian PMI round up. China’s HSBC PMI was revised slightly higher to 49.3 in April from 49.1 flash and 48.3 in March. New orders rose to 49.7 from 47.4 in March. At the margin, today’s print is constructive following the rise in the official PMI yesterday, suggesting China growth is stabilizing. .
Elsewhere, PMIs for April were stable in Korea at 51.9, but sharply lower in Taiwan. Taiwan’s manufacturing PMI fell to 51.2 from 54 in March, dragged down by a five-point fall in new orders. This supports our view that although Taiwan’s growth should have troughed in Q1, the recovery is likely to be very modest.
Japan’s monetary base slipped 0.3% yoy in April following a 0.2% yoy decline in March. Separately, labour cash earnings increased at a faster-than-expected pace in March, rising 1.3% yoy, compared with the consensus forecast of a 0.2% yoy increase.
Click here to read the full report: Americas FX Daily
Credit Suisse
Fixed Income Research & Analytics