- Carney brought the fireworks to his speech yesterday
- S&P cut the EU by a notch to AA with stable outlook
- Japan reported Q1 Tankan, May unemployment, household spending, and national CPI overnight
- China reported official and Caixin PMIs for June
- The North American session is busy
- Banxico hiked by a larger than expected 50 bp to 4.25% yesterday
The dollar is mixed against the majors ahead of the holiday weekend. The yen and the antipodeans are outperforming while sterling and the Loonie are underperforming. EM currencies are also mixed. MYR and IDR are outperforming while TRY and PLN are underperforming. MSCI Asia Pacific was up 0.5%, with the Nikkei rising 0.7%. MSCI EM is up 0.2%, with Chinese markets basically flat. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 1 bp at 1.40%. Commodity prices are mixed, with oil and copper down 1%, and gold up 1%.
The US dollar is little changed ahead of what will likely be a thin North American session due to the US holiday on Monday. The Australian and New Zealand dollars are attracting flows, ostensibly as a place to park funds, even though tomorrow’s Australian election looks a dead heat.
Carney brought the fireworks to his speech yesterday. Rather than offer vague platitudes and promises to stabilize the financial markets, Carney cut straight to the chase and said that the BOE will probably have to ease policy over the summer. This took two cents off of cable straight away.
Now that Carney has shown his hand, let’s look at the calendar. Next BOE meeting is July 14. That seems too soon. After that is August 4, which seems to be the most likely in terms of timing if Carney really is talking about the summer. After that is September 15, which most would probably say is after the summer (though autumn technically starts on September 22).
The short sterling futures strip has adjusted accordingly, with implied yields falling across the board. Sterling has stabilized a bit but continues to trade heavily. Recall that much of sterling’s outperformance last year was predicated on the BOE being the next major central bank (after the Fed) to tighten policy. This about-face is likely to continue taking a toll on sterling.
The UK reported June manufacturing PMI, which came in at 52.1 vs. 50.1 expected. Construction PMI (50.5 expected) will be reported Monday, followed by services (52.7 expected) and composite PMIs on Tuesday. As we’ve noted before, the June data is not so important, with investors looking ahead to July and Q3 for a better idea of the Brexit impact.
The final Eurozone manufacturing PMI reading for June was reported at 52.8 vs. 52.6 flash. Looking at the country breakdown, Germany rose to 54.5 vs. 54.4 flash, France rose to 48.3 vs. 47.9 flash, Italy rose to 53.5 vs. 52.4 flash, and Spain rose to 52.2 vs. 52.0 flash. The Eurozone services and composite readings will be reported Tuesday.
Meanwhile, S&P cut the EU by a notch to AA with stable outlook. Earlier in the week, both S&P and Fitch downgrade the UK. S&P noted that it reassessed its opinion on EU cohesion after the Brexit vote, adding that there is more uncertainty regarding revenue collection. It added that the Brexit vote is seen hurting the EU’s fiscal flexibility.
Japan reported May unemployment, household spending, and national CPI overnight. It also reported June Tokyo CPI. National CPI came in at -0.4% y/y in May vs. -0.5% in April. However, this may be reversed since Tokyo CPI came in at -0.5% y/y vs. -0.4% in May. Unemployment was steady at 3.2%, while the jobs-to-applicant ratio rose to 1.36. Household spending was steady at -1.1% y/y in May. BOJ next meets July 29, and overall disappointing data of late will increase expectations of a move then.
The Q2 Tankan report came out a bit later. Sentiment among the large manufacturer was flat at 6 and is expected to remain at 6 in September. Large non-manufacturer sentiment slipped to 19 from 22 and is expected to ease to 17 in September. Sentiment among smaller producers and service providers deteriorated. One bright spot was capex plans, which large companies are expected to boost by 6.2% after -0.9% in the March survey for Q1. We are somewhat suspicious, as the June manufacturing PMI (48.1 in June vs. 47.7 in May) is the fourth consecutive month in contracting territory.
Falling yields seem to be offsetting the rise in equities as a driver for the yen, which is the strongest currency today, gaining 0.6% against the dollar. The greenback was turned lower after making a marginal new high for the week in Asia near JPY103.40. A break and close below yesterday’s low (~JPY102.35) would be bearish technical development.
China reported official and Caixin PMIs for June. The official PMI came in at the expected 50, down from 50.1, while Caixin PMI came in at 48.6 vs. 49.2 expected and actual in May. This is the first snapshot for June. While China has been on the backburner recently due to Brexit, this week’s market reaction to the PBOC story regarding CNY weakness shows that it still has the capacity to deliver negative surprises, real or imagined.
The North American session is busy. The US reports manufacturing PMI and ISM, construction spending and auto sales. The US economy appears to be rebounding smartly in Q2. However, the data is unlikely to alter views of the state of economy or the outlook for Fed policy. Yesterday, the Fed’s Bullard stood by his expectation for a rate hike this year, though indicated some concern about falling inflation expectations. Next week’s jobs data will be more significant than today’s data in shaping expectations. The early call is for a gain of almost 200k net new jobs. The Fed’s Mester speaks at the European Economics and Financial Centre.
Banxico hiked by a larger than expected 50 bp to 4.25% yesterday. We think it’s a very risky move, since no one really knows what the Brexit impact is yet. There are no price pressures to speak of, with CPI inflation around 2.5% and well below the 3% target. The economy is sluggish, while oil prices are getting toppy. What happened after the last 50 bp hike in February? Yes, MXN firmed but that was due more to the overall EM recovery, not the rate hike itself. When EM sentiment turned south in May, the peso was one of the worst performers (behind ZAR and COP, two other countries that hiked rates this year). Bottom line: rate hikes won’t prevent MXN weakness when EM sentiment turns negative again.