Do EZ PMIs Put ECB Rate Cut in Doubt?

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Market Drivers for May 22 2014

EZ PMI generally lower with only GE Svc beating mark

HSBC Chinese PMI surprises to upside helps AUD to 9260

Nikkei 2.11% Europe .02%

Oil $104/bbl

Gold $1295/oz.

Europe and Asia:

AUD HSBC 49.7 5 month high

EUR Flash PMI Manufacturing 52.5 vs. 53.2

EUR Flash PMI Services 53.5 vs. 53.0

GBP UK 2nd Estimate GDP 1.3% vs. 0.4%


North America:

CAD Retail Sales 8:30

USD Unemployment 8:30

USD Flash PMI 9:45

USD Existing Home Sales 10:00

Euro was steady in morning London trade today after EZ flash PMI printed in line with expectations, but the headline number concealed big divergences in the region that still suggest a possible ECB rate cut in June. Meanwhile in Asia Aussie received a boost from surprisingly strong HSBC PMI reading rising to a high of 9270 after finding support ahead of the 9200 barrier.

In Europe the PMI readings came in line at 53.9 but there was a wide difference between Germany and France. German PMI Services rose to 56.4 indicating that that sector continues to boom. Manufacturing fell slightly but remained well above the contract/expand line at 52.5. In France however conditions were far more bleak as both services and manufacturing dipped below the 50 mark returning to contraction once again. Conditions in rest of Europe improved suggesting that the recovery in periphery remains on track.

The EZ PMI services report complicates matters a bit for ECB policymakers as it provides no clear signal of economic slowdown except for France. That may be the reason that BUBA chief Hans Weidmann continues to warn that no decision on rate cut has been made. The Germans remain reluctant participants in the program of further monetary easing as they prefer to let the EZ economy grow its way out of problems organically, but given the mixed picture on the PMI front chances of an ECB rate cut remain high.

Elsewhere in Europe the UK 2nd revision of Q1 GDP came in line at 0.8% which was a slight disappointment to cable bulls who were hoping for an upward surprise and cable drifted towards the 1.6850 level as profit taking kicked in. The pair was further hurt by the high Public Sector Net Borrowing figures which came in at 9.6B vs. 3.6B eyed. Overall, sterling remains the most fundamentally strong pair in the G-7 universe but for now it may consolidate underneath the key 1.7000 figure for the time being.

Finally in China the HSBC PMI reading suprised to the upside coming within a whisker of the 50 boom/bust level at 49.7 The improvement in activity suggest that China may be stabilizing and that news helped to lift Aussie above 9250 after the pair survived an assault by shorts on the 9200 barrier. After having fallen from 9400, the Aussie mau consolidate a bit at these ;levels but the sentiment against the pair still remains cautious and could quickly turn negative if conditions in China begin to weaken again.

In North America the calendar is relatively light with jobless claims and Existing Home sales on the docket. The market is looking for an uptick in Home sales to 4.71MM units versus 4.59MM units the period prior. A jump in housing numbers would be a welcome sign for dollar bulls as the slowdown in the sector has been one the primary concerns that the Fed would delay any normalization of the monetary policy. USD/JPY has generally traded well for most of the night boosted by the 2% plus gain in the Nikkei and if the data prints positive it may try to test the 102.00 barrier as the trading session progresses.

Boris Schlossberg
Managing Director

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