Market Drivers May 4, 2015

AU Building Approvals and job adverts all rise
EZ Final PMIs mixed
Nikkei closed Europe 0.24%
Oil $59/bbl
Gold $1181/oz.

Europe and Asia:
CNY Final Chinese PMI 48.0 vs.49.4
AUD Building Approvals 2.8% vs. 1.7%
EUR Final PMI 52 vs. 51.9

North America:
USD Factory Orders 10:00

The dollar was mildly bid at the start of the week with USD/JPY holding above the 120.00 level while EUR/USD slid further to 1.1150 before finding some support. Trading remained relatively quiet with Japan and UK closed for holidays and little fresh news on the economic calendar.

The final EZ PMI Manufacturing data rose just slightly better than expectations printing at 52.0 versus 51.9 eyed but the individual reports showed a lot of variance. In Germany and Italy the final readings were better than expected with Italian PMIs rising to their highest levels in more than a year, but in France and Spain the data lagged with French manufacturing still stuck in contractionary territory at 48 versus 48.4 projected.

The latest manufacturing results show that EZ continues to benefit from the lower exchange rate but the gains are uneven and there is little upside momentum in the data. Over the past several weeks the euro staged a massive short covering rally fueled primarily by the disappointing misses in US economic results that have shifted investors expectations of a Fed rate hike to September and perhaps even later than that. However having now risen nearly 800 points of the yearly lows the euro is likely to pause at these levels as the lackluster growth in the region could weigh on the pair as investor focus returns to fundamentals once again.

Meanwhile in Australia the speculation centers on whether the RBA will cut rates at tomorrow’s monthly meeting. The latest reading from the OIS market shows that it pricing an 80% chance of cut. The expectations have been fueled by “leaks” in the Australian press, specifically the Sydney Morning Herald which has predicted confidently that the RBA will cut.

Certainly the data from China, along with the sliding prices for iron ore suggest that the mining sector in Australia will face a very challenging environment this year and that is sure to weigh on the Australian economy as a whole. On the other hand the AU economy has been after to rebalance surprisingly well, as it shifts to more services and housing activity. Labor conditions have not deteriorated badly with the latest job adverts rising 2.3% versus -1.3% decline the period prior. More importantly, the housing market remains on fire, spurred largely by the already low rates. The latest data on Building approvals today showed a rise of 2.8% versus forecasts of -1.7% decline.

With housing boom in full force and with many Australian’s now using their superannuation pension accounts to finance further real estate activities, the RBA is justifiably concerned about the negative effects of lower rates on the already dangerous housing bubble. That’s why tomorrow’s decision may be closer than the market thinks and the monetary authorities in Sydney may choose to remain stationary for another month more.

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