Poor PMIs Shake Markets
The market reaction to the poor manufacturing purchasing managers surveys is the main driver today, with US sequester and Italian political juggernaut seemingly to be pushed into the background. The US dollar is bid and Italian bonds extended their recovery.
The odd man out today is the Japanese yen. It is counter-intuitively weak today. Not only has the dollar risen to almost JPY93, a four day high, but the euro is also firmer against the yen and is trying to re-establish a foothold above JPY121 in late morning turnover in Europe.
The ball got rolling in Asia as China’s official manufacturing PMI eased to 50.1 from 50.4 in January. The details were poor, even if not that surprising after the HSBC measure. New orders fell to 50.1 from 51.6 and new export orders fell to 47.3 from 48.5. The take away is that although the world’s second largest economy has stabilized after slowing in the H2 2011- Q3 2012, the lift is not particularly impressive and appears fragile. Of note given the concern since the end of the lunar New Year celebration of a tightening bias by the PBOC, input prices fell to 55.5 from 57.2.
In Europe, German and French readings edged higher than the flash readings. The surprises were in the euro area were in Spain and Italy–and in opposite direction. Spain’s PMI rose to 46.8 from 46.1, and while still below the 50 boom/bust level is the best since June 2011. Output and export orders rose. Italy slumped and this was before the election. The 45.8 reading in Feb compares with 47.8 in Jan. This is a three-year low. Forward looking orders data, both domestic and foreign were particularly poor, as was employment.
The euro, which had edged up to $1.31 in late Asia/early Europe, was sold on the PMIs and returned to the week’s low near $1.3020. Initial resistance is now seen near $1.3050. While the $1.30 area is thought to contain option structures, which may make it a bit sticky, the next technical objective we have suggested is in the $1.2880 area and note the 200-day moving average is near $1.2845.
The UK also surprised negatively. The manufacturing PMI slumped to 47.9 and the Jan reading was revised down to 50.5 from 50.8. There had been some improvement in the Dec-Jan period, but today’s report dashed hopes for an expansion here in Q1. Output is the weakest since October and employment the weakest since 2009. Forward looking new orders dropped to 46.6 from 49.7, a 7-month low.
Adding to the negative news stream was the drop in mortgage approvals and contraction in M4, which suggests weakness in retail sales and that the funding for lending scheme (FLS) is having little impact. Sterling dropped about 1% on the news to approach the $1.50 level. The reaction high has been about $1.5150, which is likely to provide a cap in the North American session.
The US see the PMI and ISM and auto sales. While the US economy has downshifted, it does not appear to be contracting. However, efforts to tighten fiscal in Europe, which has produced protracted contractions, is being duplicated in the US. In fact, fiscal policy looks set to tighten more in the US this year than in Europe.
Canada reports Q4 GDP figures today ahead of the central bank meeting next week. The consensus is for a 0.6% annualized pace, which includes a 0.2% contraction in Dec. The fundamentals in Canada are weakening. The housing market, broadly understood, is accounting for about 20% of Canada’s GDP, compared with 18% in the US in 2005. As the US housing market shows gradual improvement, even if in a saw tooth fashion, the Canadian housing market and construction industry is going in the other direction.
Although BOC Carney remains the toast of the town, moving over the BOE in July, he is departure from Canada will not be a moment too early. A month ago, six large Canadian banks were downgraded by Moody’s due to exposure to the rising household debt (relative to disposable income greater than in the US or UK at the peak) and exposure to the housing market. Sound familiar? The dollar is moving above CAD1.03 for the first time since the middle of 2012. The next big target is in the CAD1.0450-CAD1.05 area.