– Currencies traded in tight ranges vs USD, Asian equities mixed
– UK Services PMI may be supportive of GBP
– Likely softer US non-farm payroll, but better ISM non-manufacturing
What to watch for today
EUR: Services PMI supportive of euro. Our economists forecast that the final reading for euro zone services PMI rose to 56.7, higher than the consensus forecast for an unchanged reading.
GBP: Services PMI – balance or general slowdown? The Bloomberg consensus is for only a modest drop in the services PMI to 54.2 in May from 54.3. We think at least this level of services support for the economy is necessary to balance the recent weakening in the manufacturing PMI. However, we note that with only 3.5bps of rate hikes priced for the August BoE meeting, the clear bias of risk for the market is a strong services number.
USD: Non-farm payroll and ISM non-manufacturing in focus. Our economists forecast that non-farm payroll rose 120k in May, having lowered their forecast from 185k after the weak ADP report on Wednesday. A number in line with our estimate would be the weakest growth since January and below the 165k Bloomberg consensus and the 140k median of responses submitted after the ADP report. We expect the unemployment rate to tick back to 8.9% from 9.0% in April and look for robust labor income growth.
The non-manufacturing ISM survey should be better news for risk assets. Our economists expect that the non-manufacturing ISM rose to 55.0 in May from 52.8 in April, higher than the 54.0 consensus forecast. If right, this should provide some reassurance that the recovery in the services side of the economy remains intact. We maintain short USD recommendations versus the EUR, MXN and AUD heading into the release.
What happened overnight
Currencies traded sideways as markets consolidated ahead of the US non-farm data tonight. EURUSD was little changed and trading just a shade below 1.45, while USDJPY is back down to 80.7. AUDUSD is back to 1.068 after failing to sustain a break above 1.07 at the open. NZDUSD is steady at 0.815 with markets largely ignoring a 1.6% fall in New Zealand building permits in April. Asian equities are mixed, with the Nikkei down 0.4% while the Chinese and Taiwanese equities indices are up 0.9 and 0.5%, respectively.
MYR: The trade surplus narrowed slightly to $3.6bn in April from $4.5bn in March despite a 7.8% mom fall in exports. We expect exports to rebound in H2 along with global growth, allowing Malaysia’s central bank to maintain its current tightening stance and see the MYR outperform other Asian currencies. We continue to target USDMYR at 2.93 in three months.
CNY: Resilient services. The non-manufacturing PMI fell 0.2pp (sa) to 57.4, according to our estimate. The resilience of the services sector will help offset the weakness in the manufacturing sector and suggests that Chinese growth is unlikely to fall sharply. The Chinese Securities Journal reported that Chinese policymakers may raise interest rates in June to combat inflation. This is in line with our economist’s view that the Chinese government will continue to normalise monetary policy to curb inflationary pressures. A policy rate hike in the current climate will likely add to concerns of slowing global and Chinese growth and weigh on growth sensitive currencies like the AUD.
US output to rebound in Q3. Our US economists published a new report arguing that US auto production schedules for Q3 point to a sharp rise in manufacturing activity and a recovery in GDP growth, beginning in July.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS