The improvement in developed market data continues and we wait for the US to complete the manufacturing PMI series later today, although this is expected to buck the trend, with the pace of expansion falling modestly to 54.0.
Elsewhere when looking at manufacturing the UK is the shining light and it’s a shame it doesn’t contribute more significantly to overall growth. In fact at 57.2 it is the highest reading since 2011, and drilling down the new orders and output component is now at the highest level in nearly twenty years. The question is whether this is sustainable and what it means for future monetary policy. With cable trading at 1.5550 and EUR/GBP 0.8481 we have to feel the market is pricing in the strong recover, but also a move closer to 7% unemployment before 2016. With a current account deficit of 4% of GDP, it’s still not time to be significantly overweight sterling, but it seems the UK is outperforming on a number of different metrics against its European neighbours.
(Manufacturing PMI series – UK white, Germany green, Italy orange and France yellow)
Growth in the G10 region for 2014 is expected to print between 2% and 2.5%, which to be fair is still pretty tepid and with the US likely to grow around 2.7% it is hardly inspiring. However there is growth and at these predicted levels should see bond yields contained and equities in the overweight camp. The moves in Asian equities today are again positive and thematic of a market that is looking past the September bond tapering prospect in the US and onto its own individual issues. Low and behold, perhaps tapering is even in the price and good US data this week in the shape of manufacturing and services PMI, ADP private payrolls, trade balance and the payrolls report could act as a spring board for growth focused assets.
Japan has been the Asian outperformer today, with USD/JPY breaking through the overnight highs and reaching 99.70, before falling back. Is the pair ready to break back into the 100.00 to 105.00 range again? Well, with the US ten-year treasury re-opening and trading up five basis points to 2.83% today, this divergence has once again highlighted the yield gap against Japanese government bonds to 208bp, which has to aid the USD’s valuation. However we’ve also seen a better than expected capital spending print (unchanged vs. -2.1%) , company profits up 24%, a 42% increase in the monetary base in August and a 0.4% increase in Labor cash earnings (July) and you have to say this is an equity positive. What’s more local press is suggesting that the final print of the Q2 GDP print is expected to tick back to around 3.8%, after falling to 2.6% on the previous revision. There are even economists expecting 4.7%. Clearly a number nicely above 3% feeds into the idea that the government will have the firepower to raise the corporate tax and show the Abe government are in full control of policy.
It’s also worth highlighting that Japan is favourite to host the 2020 Olympic games, while Madrid are some way behind. With the G20 being held over the latter stages of the week Shinzo Abe is expected to leave the event early to attend the IOC (International Olympic Committee) grand assembly to see who gets to host the event. It’s interesting to see Japan underperform other bidding nations markets of late, however we see that reversing with Abe’s approval rating likely to improve, while there will clearly be a positive impact on construction demand, which would clearly be funded through government spending.
China is up 1.5% and despite its services PMI index falling to 53.9 in August, the price action still looks quite encouraging. Again the sovereign feedback loop will be helping given the improvement in the European PMI series and what that could mean for external demand of Chinese exports. The bid seen in resource names in Australia (RIO +2.9%, FMG +3.6% and BHP +0.7%) testament to more constructive view on China.
If the market is looking for disappointment then Australia is probably the place to find it. Retail sales gained 0.1% in August, which was not only below the 0.4% expected from economists, but was the fifth month in a row it missed forecasts and this included the one-off ‘school kids’ bonus. It’s clear the consumer is not spending, despite confidence improving and this was seen in department stores sales falling 8%. We also saw the Q2 balance of payments highlighting a 7% increase in the deficit to $9.35 billion, representing 2.4% of GDP. We also know net exports won’t contribute towards tomorrows GDP and while the consensus is for 0.6% for the quarter, however given today’s data, one gets the sense this print could come in closer to 0.2%.
In terms of AUD/USD, the pair hit a low of 0.8971 after the morning data. The pair however found buyers into the RBA meeting and continued higher after the statement, hitting a high of 0.9048 (up 60 pips after the statement). This was a market short of AUDs, and the statement was as neutral as you can get; however the new line in the statement was ‘volatility in financial markets has increased and has affected a number of emerging market economies in particular. Notwithstanding the higher volatility, Australian institutions have ample access to funding markets.’ The fact the bond market moved up four basis points also suggests the RBA could have shown more concern at the rise in longer-dated yields, like the ECB or BoE, yet they showed noconcern at all. The RBA won’t cut again now until at least November, and looking at the OIS market, the chance of a cut in November has lowered on the back of this statement. We think that is unwise and after tomorrows weak Q2 GDP read, a couple of poor employment reports and a weak CPI print on October 23 the probability of a November cut should increase. The irony of the whole situation is the higher the AUD, the more likely the RBA to cut in the future.
(Todays moves in AUD/USD)
European markets won’t see the same sorts of gains as yesterday, but after yesterday’s positive price action there will be some hoping for a pullback to buy. With the US coming back on-line and liquidity likely to increase again, price action will take on much more meaning. UK construction PMI is on the cards today, however it’s the US ISM manufacturing report which will dominate the focus, effectively kicking off the raft of tier one data releases this week.