The US dollar is struggling to maintain even modest upticks against the
euro and sterling despite the recognition of the increased likelihood of a June
Fed hike. Bloomberg sees current pricing in the Fed funds
as making a hike in June a near certainty (97.5%), while the CME and our own calculation estimates the market is
discounting around 70%-75% chance of a hike.
The main economic news today comes in the form of service PMIs.
China got the ball rolling. Caixin measures of services slipped to
51.5 from 52.2. It has slipped every month this year so far and is at the
lowest level since last May. The composite eases to 51.2 from 52.1.
It is the lowest since last June. The data, like the official PMI, warn that the world’s second-largest economy has lost momentum.
It is yet to be seen whether the weaker growth impulses translate to increased
debt stress and new capital outflows.
The eurozone services rose to 56.4 from a flash reading of 56.2 (and 56.0 in
March). It is a new multiyear high. The composite rose to 56.8
from 56.7 flash (and 56.4 in
March). It suggests the regional economy is off to a strong start to
Q2. In terms of country breakdown,
German services beat the flash (55.4 vs. 54.7), but France did not. Its
final services reading was 56.7 rather than the 57.7 flash
report.
Spain and Italy offered upside surprises. Italian service
PMI was 56.2 up from 52.9. The composite reading of 56.8 (from 54.2) is
new multiyear highs. We suspect that if Italy’s composite PMI translates
into stronger growth, investors will be surprised at how much seemingly
structural problems, including non-performing loans, can be eased. Spain goes from good news to
better. Its service PMI rose to 57.8 from 57.4, and the composite rose to
57.3 from 56.8.
Separately, the eurozone March
retail sales rose 0.3% for a 2.3% year-over-year pace. Although the
February data were revised lower, the
year-over-year pace is the strongest since last October. Spain reported a
129.3k drop in its unemployment.
Typically, Spain enjoys strong employment gains in the April-May
period.
The UK made it a trifecta. With today’s news on the service sector,
all three of the UK’s PMIs this week defied expectations and rose. The
service PMI rose to 55.8 from 55.0 (expectations for more a 54.5
reading|). The composite rose to 56.2 from a revised 54.8. It is
the second consecutive increase and the highest reading here in
2017. March consumer lending and mortgage approvals were also
stronger than expected.
The euro and sterling have recovered from earlier weakness. The
euro eased to $1.0875, the low since April 28, but rebounded quickly to the
upper end of the nine-day range that is seen
near $1.0950. The US premium over Germany on two-year money has recovered
to 203 bp today, the most in three
weeks. If the premium continues to widen, we expect the dollar to get
better traction. Sterling was sold to nearly $1.2830, the low since April
26, but also snapped back. News that Prince Philip will step back
from royal duties that involve extensive travel seemed to have a little perceptible impact.
Norway’s central bank was the third major central bank that met this week
and decided to keep the current policy settings. This was widely
expected. The euro has been rallying against the krone since late
February and is up about 7.5%. Indeed it
has been nearly straight up for the past three weeks. Today’s gains
extend the streak to the fifth consecutive session and 11of 13 sessions
starting April 18. Technical indicators are getting stretched and look
for some reversal pattern to indicate a top is in place as the euro approaches
NOK9.50, a level not seen since last July.
UK Prime Minister May’s claim that the EU was interfering with the UK
election seems wide of the mark. Last week EU meeting was planned
long before May’s reversal and call for a snap election. After rejecting
calls for an election, May gave in, in part to strengthen her hand in EU
negotiations. Essentially, the EU said it would not work. Juncker
and Merkel’s claims that the UK had illusions about what was possible is not an
endorsement of any candidate or program. The UK has formally triggered
Article 50, and the amputation process
will begin.
Clearly, it is unreasonable to expect that it will get as good of a deal
or a better one outside the EU than inside. A hard exit, by which it
is mean the loss of access and
privileges, seems to be the most likely scenario, in exchange for more control
over its borders, domestic regulations, and free to enter other trade
agreements. Moreover, in the current context, where Russia is accused of
trying to influence not only US elections but some European elections as well,
May’s accusation seems to equate the two.
Elsewhere, we note that metal prices are suffering their biggest single-day decline this year. Iron
ore and steel futures in China were limit down. Copper extended
yesterday’s 3.5% decline as stockpiles at the LME jumped by the most in two
months. Nickel fell 2% today after a 3% drop yesterday.
Weakness in China’s manufacturing PMI was a catalyst. Oil prices are
giving back yesterday’s modest gain as US inventories fell less than expected,
while gasoline inventories rose less than expected.
The dollar-bloc currencies continue to underperform the majors except for the yen. The firm US
Treasury yields (~2.33%) the upper end of the two-week range has helped keep
the dollar’s uptrend against the yen
intact. The dollar has gained against the yen for six consecutive sessions,
counting today’s upticks and eight of nine sessions. The downtrend line from the January and March highs comes in near
JPY113.00.
Since Q1 US GDP is behind us, monthly data from the first three months of
the year may be of little consequence except for economists trying to
anticipate revisions. Ahead of tomorrow’s non-farm payroll report,
investors may watch the progress of the
health care reform bill that is expected to come up for a vote
today. It is very close, and even if it passes today, the next
hurdle is formidable: the Senate. The idea, however, is to work out the differences in reconciliation and
this process requires a simple majority.
Unlike the budget bill for the remainder of the fiscal year that was a
bipartisan effort, the health care is unlikely to get a Democrat vote.
The health care savings initially were going to free up $1 trillion that the
GOP wanted to use to fund tax reform. The new proposals do not show that
that level of savings. This will
force tax reform to be scaled back, rely
more on inflated growth prospects, or get moderate Democrat support.