The US dollar is consolidating yesterday’s losses. The
greenback’s upticks have thus far been shallow and unimpressive, except perhaps
against the New Zealand dollar, which is off 0.8% ahead of next week’s RBNZ
meeting. Softer than expected labor cost increase reinforces the
conviction that a 25 bp rate cut will be
delivered next week.
The asset markets are more interesting than the foreign exchange market
today. The surge in Japanese bond yields steadied earlier
today. After rising nearly 30 bp since the middle of last week ostensibly
in disappointment to the BOJ reluctance to increase its bond purchases, the
10-year JGB yield slipped a single basis point today, leaving the benchmark
yield at nearly -10 bp. European bond yields appeared to have been
pushed higher by the sharp move in Japan have also steadied today.
Following the sell-off on Wall Street yesterday, global equity markets
are lower. Nearly all the Asian
markets were lower. The MSCI Asia-Pacific Index was off almost
1.8%; its biggest loss since the UK referendum. It is the first time in a
month (July 5-6) that the index was off two consecutive sessions. Chinese
shares were the exception as small gains were
posted, and it was the second consecutive advance.
European equities are mostly lower, with the Dow Jones Stoxx 600 off
about 0.2% near midday. Of note,
the financial sector is bucking the trend to post modest gains (~0.6%).
News that of a share buyback program from one of the large UK-based banks and a
recovery in Italian banks (bank index is up almost 2%, after falling around 11%
in the past two sessions).
The main economic news today is the non-manufacturing PMIs.
There were few surprises and aside from the incremental addition to the information set, the reports are unlikely
to shift policy expectations. China’s Caixin service PMI fell
to 51.7 from 52.7 (recall that the official measure edged higher to 53.9 from
53.7). The Caixin composite measure rose to 51.9 from 50.3. This is the highest reading since September
2014 and helps reinforce the sense that the Chinese economy is
stabilizing. Separately, Australia’s services PMI rose to 53.9 from
51.3. It is the strongest since last August.
In Europe, the EMU services PMI rose to 52.9 from the 52.7 flash reading.
It stood at 52.8 in June. The composite PMI rose to 53.2 from 52.9 flash and 53.1 in June. Highlights
from the national reports include a 54.4 German reading, down from 54.6 flash, but up from 53.7 in June and France was
revised to 50.5 from 50.3 flash and 49.9
in June.
Italy’s services PMI ticked up to 52.0 from 51.9. It is the
best reading since April and follows the lowest manufacturing PMI in 18
months. Spain offered the biggest disappointment. Its service PMI
fell to 54.1 from 56.0. Of note, Spain’s composite reading of
53.7 (down from 55.7 in June) is the lowest results since late-2013. It
is part of the growing signs that began earlier Q2 that the Spanish economy is
moderating.
The main takeaway is the eurozone
economy does not appear to have been impacted (yet) by the UK decision to leave
the EU. The UK is a different story. Today’s services PMI
confirmed the preliminary 47.4 estimate. It is down from 52.3 in June and
53.5 in May. What was a slow decline (59.5 in June 2015) has accelerated. The composite reading
of 47.5 is a little below the flash
reading and contrasts with the 52.5 June report, which was the average for
Q2.
It is little wonder that NISER warned that the UK economy is likely contracting here in Q3 and estimated a 50% chance
that Q4 contracts as well. The market anticipates a rate cut tomorrow but is more divided on the outlook for
new asset purchases and other credit easing measures. Recall that tomorrow the BOE will announce the outcome of
the meeting, release the minutes, provide updated economic forecasts, hold a
press conference. The market may be disappointed if the BOE only cuts rate, but
we suspect that there is a risk of “sell the rumor buy the fact” type
of activity.
The US reports dueling surveys, with the Markit service PMI expected to
tick up from the 50.9 flash reading to 51.0. In June it was 51.4 and
averaged 51.8 in Q2 and 51.4 in Q1. The ISM non-manufacturing survey is
expected to slip to 55.9 from 56.5. It averaged 55.0 in Q2 and 53.8 in
Q1. The market reaction may be minimal provided the ADP employment
estimate does not come in much below the 172k in June. The DOE
energy report will draw interest after the 1.3 mln barrel drawdown in the API estimate, which may be
helping prices stabilize today.
The euro
is stalling at the 61.8% retracement objective of
the decline was seen since the UK
referendum. That level is seen near $1.1230. Initial support is seen in front of $1.1150.
Sterling and the yen are in narrow
ranges near yesterday’s best levels. The
Australian dollar is holding below a
downtrend line drawn off the late-April and mid-July highs. The third point in the line was yesterday’s high just under $0.7640. The euro posted a reversal on the daily bar charts against sterling yesterday, and there has been modest follow
through selling today. A break of
GBP0.8380 could push it toward GBP0.8330.