- Disappointing US ADP cannot compensate for weaker PMIs elsewhere
Risk remained under pressure yesterday, with sentiment weighed down by poor Eurozone and Swiss PMI data, and by pressure on Spanish and Italian bank stocks. EUR- and CHF-led dollar strength was partially reversed by the weaker than expected US ADP employment report, but while the USD ended the New York session on a softer tone, EUR, CHF and
NZD all ended the day lower by about 0.6%. The softness in the Kiwi was extended as jobs data showed the unemployment rate jumping unexpectedly from a revised 6.4% to 6.7%, but with all of the increase (and more) coming from a labour higher participation rate, the damage was not lasting. Clearly though, some nervousness is apparent in the commodity currencies, and in AUD in particular as the Australian services PMI equivalent plunged to the lowest level in three years. Ahead of tomorrow’s US NFP and the RBA’s quarterly Statement on Monetary Policy – where the RBA will detail its latest outlook on growth and inflation – there may not be the appetite for a push lower. But the near-term risk is now for a test of key support levels on the 1.02 handle, with the rising trendline from 2009 at 1.0240 the most important.
- King fails to move GBP, but he might not like further currency strength
GBP was unmoved late in the NY day by comments from BoE Governor King, who argued the case for interest rates needing to remain low for the time being, while promising they would return to a more normal level at some point. On the currency, King was insistent that control over the pound had helped the UK weather its crisis better than the euro area. ‘We have been able to lower the value of Sterling to make the British economy more competitive’, King said. This raises the obvious question as to whether further significant GBP appreciation (which we do expect) could be a catalyst for additional QE – particularly in the face of Tuesday’s weak manufacturing PMI data. Today’s services sector PMI is arguably even more significant (services represent some 70% of the UK economy) and if we see a bigger than expected drop (consensus 54.1 from 55.3, BNP 54.0) sterling could suffer a setback ahead of next week’s MPC meeting.
- Spain, France auctions then ECB main focus today
Ahead of the day’s main event today, we will have important bond auctions from Spain and France (10:30 and 11:00 am respectively local times). Spain taps the 3y 4.0% July 2015 Bono, the 5y 3.8% Jan 2017 and reopens the 5y 5.5% July 2017 bond. EUR1.5-2.0bn is the total target size. Poor results will tend to confirm that LTRO cash is starting to run thin, and in that case EUR could suffer. France meanwhile is looking to sell EUR6.5-7.0bn of bonds ranging from 2017 to 2025. The French Presidential TV debate failed to result in a resounding win for either side, and the margin of advantage in the polls suggests that the Presidency is now Hollande’s to lose. The focus thus will be on what extent investor participation is affected by an increasingly likely Hollande victory, though to date there has been limited pressure on OAT/Bund spreads. As for the ECB, money markets ascribe very low odds to a rate change, but we are on guard for a shift of tone at the ensuing press conference. With so little priced in with regards to future rate cut risk (8bp one year hence) there is ample scope for a larger reaction should Mr Draghi drop any hints of a possible need for fresh monetary stimulus. If he does, we would expect EUR to suffer even if any such action from the ECB will be viewed as growth-enhancing.
- US non-manufacturing ISM, claims key for USD
The USD continue to show ultra-sensitivity to local data, as it should in the context of high uncertainty over what if anything the Fed may do after ‘Twist’ rolls off in June. The employment component of the non-manufacturing ISM survey can be a significant input into non-farm payroll forecasts so is to be closely watched As for the headline reading, a drop to 55.3 from 56.0 is expected (BNP 55.0). After the upside surprise in the manufacturing ISM, the market might now be better priced for something closer to unchanged. Before this, the weekly jobless claims numbers will be important; a number much above the 379k consensus would amplify concerns that payroll growth is going through a soft patch. The USD would not like this even if final judgment is to be reserved for Friday.
BNP Paribas