The US$ was mixed on Friday. The main mover was the Euro, which headed sharply lower after the release of the EU PMIs, where Germany in particular had a much lower than expected reading in the manufacturing sector, with the German Manufacturing PMI falling to 44.7, down from 47.6 and missed expectation of 48.0. This was the lowest level in almost 7 years, raising the prospect of a recession and sent the 10-Year Bund Yield into negative territory (-0.023%). The Eurozone manufacturing PMI dropped to 47.6, down from 49.3 and also missed the expectation of 49.5, the lowest level in 6 years. Although the Euro headed sharply lower, both Sterling and the Chf held their ground and the dollar made gains against the Aud and Kiwi, as growth concerns hampered the commodity bloc currencies. US$Jpy headed lower on the back of negative risk sentiment and the consequent safe-haven demand for the Jpy, and followed stocks down, with the S+P/DJI both lower by around 1.8% and the Nasdaq by 2.5%.
The flight to safe-haven territory saw a run into bonds, sending the US10Y yield through important support at 2.5%, before heading down to 2.44%, a 14-month low, as growth worries further weighed on inflation expectations. The bond yield curve between the 3 month and 10 year yields actually inverted on Friday for the first time since 2007, and is spooking traders who feel that the Fed may actually neeed to cut rates in the near future. We shall see. Note that there will be a steady stream of Fed speakers through the coming week, who will be closely monitored for their views following last week’s poor set of manufacturing data. If there is a decidedly more dovish tilt, expect the US$ to run out of any upside steam, with Yields, US$Jpy, stocks and possibly WTI and the Aud$ also likely to take a hit. Stocks were not alone in turning lower at the prospect of lower growth; so did oil, which fell by (WTI) 1.75% as the outlook for diminishing demand weighed on the price.
In terms of other US data on Friday, the US Markit Manufacturing PMI missed expectation of 53.6, coming in at 52.5, but is still in growth territory, while the Existing Home Sales rose by 11.8%, beating expectations of a 2.8% rise.
The coming week will have a steady flow of data most days although much of it is of a secondary nature, and with the March 29 Brexit date now almost upon us, Sterling seems to be the likely driver of any major directional move. Whether Theresa May will still be the PM by then is another story altogether, and over the weekend the UK Press suggested that members of her cabinet believe she will have to resign this week although any rumours of an internal coup have since been denied. The EU has allowed the UK to extend its final sign off date until April 12 before it crashes out if Theresa May’s deal fails again, but the UK will be able to stay in the bloc until May 22, if she finally wins. Unlikely I think. The EU has also warned that Britain is heading for a no-deal Brexit unless the House of Commons ratifies the withdrawal agreement negotiated with Brussels.
In terms of data, today will see the German IFO, which will be closely watched, while from the US we get the Chicago National Activity Index and the Dallas Fed Mfg Business Climate. Tomorrow will be thin for the first part of the day although there will be a fair bit of US housing data on the agenda later on. Wednesday will kick off with the RBNZ Interest Rate Decision (no change expected, but given that GDP was 0.6% q/q, below the RBNZ’s expectation of 0.8%, it is possible that the RBNZ will acknowledge softer growth via a mildly dovish tone) but is otherwise thin of economic data. Thursday will also be quiet until the release of the German CPI and then the Q4 US GDP and the US Personal Consumption/ Expenditure. Finally, Friday will be Brexit day and will also see the release of the UK Q4 GDP and then the US Personal Consumption/Expenditure Index. Have a good week.
Economic data highlights will include:
Mon: Fed’s Evans speech, Japan All Industry Activity Index, German IFO Business Climate/Expectations, Chicago National Activity Index, Dallas Fed Mfg Business Climate, Speech; Fed’s Harker
Tue: Speech; RBA’s Ellis, Speech; Fed’s Rosengren, NZ Trade Balance, German Consumer Confidence, US Housing Starts, Building Permits, Case Shiller House Price Index, House Price Index, Consumer Confidence, Richmond Fed Mfg Index, API Weekly Crude Oil Stock Inventory
Wed: Speech; RBA’s Kent, RBNZ Interest Rate Decision/Statement, Swiss ZEW Survey, Quarterly Bulletin, UK CBI Distributive Trade Survey – Realised, US Current Account, Trade Balance, Speech; Fed’s George, EIA Crude Oil Stocks Weekly Change
Thur: NZ ANZ Business Confidence, EU Economic Sentiment Indicator, Industrial Confidence, Services Sentiment, Business Climate, German CPI, US Q4 GDP, US Personal Consumption/Expenditure, Pending Home Sales, Kansas Fed Mfg Activity , Speeches; Fed’s Quarles, Clarida, Bullard
Fri: Brexit due date, NZ Building Permits, Tokyo CPI, Japan Unemployment, Industrial Production, Retail Trade, Construction Orders, Housing Starts, Australian Private Sector Credit, German Retail Sales, Import/Export Index, German Unemployment, UK Q4 GDP, Total Business Investment, US Personal Consumption/Expenditure Index, Chicago Purchasing Managers Index, Michigan Consumer Sentiment Index, New Home Sa Speech; Fed’s Quarles .
Market moves, in brief:
FX: DXY 96.55 (+0.2%)
Bonds: US10Y; 2.444% (-4.09%), German 10Y; -0.022%(-152%), UK 10Y; 1.014% (4.65%), Australian 10Y; 1.844% (2.41%), NZ 10Y; 1.99% (-1.0 %), China 10Y; 3.161% (-0.44%)
Stock Indices: DJI; -1.77%, S+P; -1.90%, NASDAQ; -2.23%, EUStoxx50; -2.47%, FTSE100; -2.01%, Shanghai Composite; +0.09%
Metals: Gold 1313 oz (0.3%), Silver 15.44 oz (-0.18%), Copper 2.85 lb (-2.2%), Iron Ore 85.89 p.t. (+0.28%),
Oil: WTI 58.86 pb (-1.65%)
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