Euro subdued against greenback as cbanks’ policy divergence continues
Pound edges up after early losses; yen volatile
United States
The week ended with both the ECB and the OPEC meeting, but neither in the mood for a radical action. With oil prices hovering close to the fifty levels, there was clearly no need to a policy agreement, while the ECB press conference saw President Draghi maintain his usual very dovish tone, however with not much material movement in the currency market.
This week also saw the end of the G7 finance ministers two-day meeting in Sendai Japan, without an agreement on any economic policy issues, including those surrounding the recent sharp appreciation of the Japanese Yen. The unwillingness of policymakers to address Japan’s continuous appeals for exchange rate intervention will potentially expedite the introduction of a new Abenomics program.
The latest data out of the US surprised markets as the Non-Farm Payrolls added the fewest number of workers in almost six years with declines in payrolls in construction, manufacturing and mining. March and April were revised down by a combined 59,000, while the three-month average in payrolls is now just 116,000, the weakest since July 2012, at the bottom end of the range that most Fed officials think will keep the unemployment rate steady. The broad cutbacks may raise concern about US growth and prompt Federal Reserve policy makers to put off an increase in interest rates.
Despite the weak US manufacturing data and the potential message they portray over the second half of the year, Fed officials have initially succeeded in getting markets to re-price the chances of a rate hike this summer without triggering either volatility or asset price weakness. However, with the disappointing payrolls, markets may be plunged back into uncertainty with investors giving up once again.
In summary, with the disappointing job report released this week, we remain in a fragile risk on mode while markets remain in a wait and see mode for the Fed meeting in June as well as July.
On the currency front, the Euro remained subdued against the US dollar as the divergence in policy between the Fed and the ECB continues to dictate the movement in the pair. The Euro opened the week at 1.1114, while the ECB meeting was a non-event for the currency. The currency ended on a strong note following the job report at 1.1367.
When investors thought “Brexit” risks were long gone, the latest polls this week started to indicate gains registered by the exit camp. Immediately, the Pound reacted by losing ground against the US Dollar. The currency opened the week at 1.4623 dropping throughout the week however ended the week slightly higher after the dismal US job report.
The Japanese Yen remains extremely volatile against the greenback last week. Initially the US Dollar gained some grounds against the Yen following the G7 meetings. After reaching a high of 111.45 amid positive US data and hopes of new Japanese stimulus, investors closed their positions while waiting for the new Abe proposal, making the Yen gain over 2%. The pair closed the week very strong at 106.53
On the commodities side, Brent ended the week at $50 a barrel. The third drop in U.S. crude inventories in four weeks tempered the impact of OPEC’s decision to stick to a policy of free production, turning down a proposal to adopt a new ceiling on output. The latest US crude inventory data showed stockpiles dropped by 1.4 million barrels last week.
The week started trading Yellen’s speech of late last week, reaffirming her colleagues speeches in recent weeks in that a rate hike ‘in the coming months’ is likely to be appropriate. St Louis Fed President Bullard added that in his view “markets are well prepared for a possible rate increase globally”. Bullard also added that that he doesn’t think that a change in the White House either way will affect the Fed’s policy and monetary policy did not need to address labor participation and participation rate moves independently of rate policy.
Adding on this, Robert Kaplan, Dallas Fed president, said that he is expecting ‘solid job growth’ in the employment report and that he would advocate for tightening in the ‘near future’ without offering more specific timing. On the subject of the Brexit vote, he said that the Fed needs to ‘be prepared’ although a more cautious view on that was given by the Fed’s Tarullo. Indeed, member of the Fed Board of Governors, Daniel Tarullo said that the Brexit vote is bringing a lot of uncertainty and is a factor that he would consider in his policy outlook. He went on to say that ‘in the short term it is more a question on the immediate impact on markets’. Tarullo also spoke on the subject on banking regulation and said that he expects stress tests for the bigger US banks to get stricter in the near term
This week, manufacturing data was out with the overall outcome being one which made for a fairly mixed assessment of the economy. The ISM manufacturing release for May rose unexpectedly to 51.3 from 50.8 after expectations were for a 0.5 point decline. The details were a bit more mixed with new orders coming at -0.1 point to 55.7 down, employment 49.2 unchanged and orders at -3.5 points to 50.5 sharply down. This number was offset by an increase in prices paid moving up by 4.5 points to 63.5, the highest level since 2011 and new export orders remaining unchanged at 52.5. The manufacturing PMI data was also out revised up 0.2 points to 50.7, however construction spending was weak in April dropping 1.8% over the month.
Nominal personal consumption expenditure increased 1.0% in April, the largest monthly gain since August 2009. The April level of PCE was up nearly 3% annualized from its Q1 average. However, motor vehicles and parts accounted for nearly 30% of last month’s real PCE increase.
Chicago PMI was also out this week, slipping -1.1 points to 49.3 in May. The details of the Chicago report were weak. The ISM Chicago declined four points to 48.0, adding to the weakness in the NY Empire and Philadelphia Fed manufacturing indices.
Construction spending in April fell by 1.8%, the most since January 2011 but the market ignored the data due to the strong upward revisions to the prior two months. Over the last three months, construction spending increased at a 4.3% annualized rate. In details, private residential construction is up a much stronger 18.5%, showing a further improvement in the housing sector. The year-over-year growth rate remains at an 8% level
The latest change in nonfarm payrolls showed that the US economy added only 38,000 jobs in May missing expectations for a 159K increase. The report marked the fewest number of employees added in six years with declines in payrolls in construction, manufacturing and mining. March and April were revised down by a combined 59,000, while the three-month average in payrolls is now just 116,000, the weakest since July 2012, at the bottom end of the range that most Fed officials think will keep the unemployment rate stead.
Europe & UK
This week’s ECB meeting ended with not much news. The focus of the meeting was on implementing the broad package of measures that have been agreed in recent months. But the ECB’s revised forecasts for growth and inflation remained largely unchanged, despite the earlier announcement of a wide range of stimulus measures. In particular, core inflation forecasts were lowered, raising the question of whether more easing will be needed.
In summary, the overall tone of meeting was one of confidence and patience about the new policies being implemented before any real conclusions are drawn. Draghi noted that the council was waiting for three main events before assessing the success or failure of the current policies. Draghi’s commented on the UK referendum suggesting that the euro area could suffer from a UK decision to leave the EU. Additionally, Draghi mentioned the corporate sector purchase programme will start on June 8th while the second tranche of the ECB long term financing auction will be allocated on June 23rd. Finally, Draghi touched on the exchange rate saying the Council continues to expect the exchange rate to weaken thanks to divergent monetary policy cycles.
The Euro area unemployment rate was 10.2% in April, stable compared with March 2016, and down from 11.0% in April 2015, and the lowest rate recorded in the Euro area since August 2011. Euro area annual inflation also was out at -0.1 percent for May. The inflation figure was in line with expectations and slightly higher than the -0.2% reading seen in April. However, the latest number is still far from the 2% inflation target set by the ECB. In Addition, money supply growth was weaker than expected, down from 5% yearon-year in March to 4.6% in April.
On different front, the Euro zone business growth improved more than expected in May but remained modest. Final composite Purchasing Managers’ Index for the whole Eurozone came at 53.1 in May, beating estimates of 52.9 and April’s 53.0. According to the survey, data are signaling a GDP rise of 0.3% in the second quarter of 2016 after expanding 0.5% in the first quarter. Spain composite PMI beat expectations coming at 54.8 compared to forecasts of 54.2 while France disappointed on the back of the work strikes taking effect at the moment. The latest news out of the UK is majorly dominated by the fear of Brexit. Wednesday saw a warning from the OECD on growth alongside various polls suggesting the referendum was going to be a tight race. This, along with the general risk-off theme, saw a potential 30% probability of a rate cut before the end of the year in the UK.
On the data side, the May construction PMI came slightly weaker than expected at 51.2 while expectations were for 52 in May, its weakest for almost three years and incoming new work declining for the first time since April 2013. May signaled the worst month for commercial building since June 2013 and indicated that survey respondents said the June 23 referendum had disrupted new order flows and the timing of client decision making.
Manufacturing PMI was also out at 50.1, up from 49.4 in April. While new manufacturing business improved a little domestically, new export business dropped for the fifth month in a row on the back of a slowing global economy and the upcoming EU referendum. Over a third surveyed by the report said that uncertainty over a possible Brexit on June 23 was having a “detrimental” effect on their business, with 8% saying the impact was “strongly detrimental”
Asia
China’s service economy decelerated in May easing to a three-month low of 51.2, from 51.8 in April. According to the report, slow business orders, marginal job creation and lower production among manufacturers were key factors that underpinned May’s performance. The services sector, whose biggest components include realestate and financial services, account for the bulk of gross domestic product and is the pillar of the country’s new economic program.
On a different front, China’s manufacturing PMI dropped to 49.2 in May from 49.4 in April, the 15th straight month that index has remained in contractionary territory. The latest data suggest that despite being weak, Beijing’s monetary and fiscal stimulus early this year should make it easier for China to reach its 2016 growth target of at least 6.5% this year.
This week, Japan PM Shinzo Abe formally announced that the consumption tax hike to 10% scheduled for April 2017 would be postponed by two and a half years until October 2019. He said the reason for this was the risk of an economic slowdown and the need to mobilize policy to prepare for such risk. He said the Upper House election on 10 July would provide voters an opportunity to pass judgment on the decision. Abe however did not reveal the size or details of additional economic stimulus plans, which the market is interested in.
Business activity in Australia has been strong over the past month, suggesting the RBA has time on its side to deal with the issues presented by a structurally lower inflation outlook.
This week, Australia’s data came on the strong side with the economy growing 1.1% in the first quarter, and 3.1% over the past year, its fastest quarterly growth since March 2012. In details, growth was driven largely by a surge in export volumes, which contributed 1% out of the 1.1% quarterly growth. Household consumption also added to the better-than-expected economic expansion, contributing 0.4%. The negative point in the report was from growth in business investment in engineering construction and new buildings, which dropped 2.2%. By industry, production growth was mainly down to mining, up 6.2% over the quarter.
Kuwait
The USDKWD opened at 0.30110 on Sunday morning.