Manufacturing PMIs, US Jobs, and Implications of Harvey

<br /> Manufacturing PMIs, US Jobs, and Implications of Harvey – Marc to Market<br />




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As the markets head into the weekend,
global equities are firmer, benchmark 10-year
yields are mostly lower, and the dollar is consolidating after North American
pared the greenback’s gains yesterday.
  Manufacturing PMIs from China, EMU, and the UK have been reported,
while in the US, the August jobs data stand
in the way of the long holiday weekend for Americans.  
China’s Caixin manufacturing
PMI ticked to 51.6 from 51.1, confirmed
the improvement seen in the official measure.
  The resilience of China’s economy is one of
this year’s pleasant surprises.   The years
high was set at 51.7 in February, just below the cyclical peak last December at
51.9.  
EMU’s manufacturing PMI was
unchanged from the flash reading of 57.4 after 56.6 in July. 
 Export orders and firm domestic
demand point underpin the European factories.  In terms of country breakdown, German’s flash reading of 59.4 was shaved to 59.3.  It is still quite
strong.  France was unchanged from the flash reading of 55.8.  The
new news was from Spain and Italy.  Spain disappointed with a 52.4
manufacturing PMI, down from July’s 54.0.  Italy offered an upside
surprise, with a jump to 56.3 from 55.1, a new multi-year
high. 
The news is unlikely to change expectations for next week’s
ECB meeting.
 Many,
like ourselves, expect the ECB to announce that its asset purchases will be extended though at a slower pace in 2018.
 Others expected a hint of this next week, but a formal decision may not be made until October.  In terms of amounts,  we have argued that
by cutting the amount in half to 30 bln a month, it would give the central bank
the maximum flexibility to stop in June.  However, a reduction to 40 bln
euros a month would likely mean the buying spills over into H2 18. 
News that the UK’s
manufacturing PMI unexpectedly rose to 56.9 from a revised 55.3 (from 55.1
originally) helped lift sterling briefly
before it slipped back.
  The
cyclical high was recorded in April at
57.0.  New orders were the strongest since May.  Job creation was the
highest in three years.  The public barbs between the EU and the UK over
Brexit may give a pre-taste of this month has in store, ahead of the October EU
Summit.  
Reports in some of the
British press has played up the moderation of the UK government’s stance.
 From the EU’s point of view, the UK
still acts as if it controls the agenda and resisting EU’s demand that the
conditions of the severing are decided (or substantial progress is made) before talking about how the two areas
will be related afterward. 
Japan reported a soft Q2 capex report.  It rose 1.5% in Q2.  The Bloomberg
consensus was for a nearly 8% gain after a 4.5% increase in Q1.  This warns of a substantial
revision to Q2 GDP that will be reported
next week.  Rather than expand by 1% quarter-over-quarter, the pace is
likely to slow to a still robust 0.7%.  
Many economists had been
braced for a slowing of US jobs growth as the expansion matures.
  However, jobs growth in the
first seven months averaged 184k which is essentially the same as last year’s
average (187k).  Over the past three months, jobs growth has averaged 195k, and some reversion to the mean is expected.  Barring a significant
downside surprise, the focus will not be on the job creation itself.  The
key is average hourly pay.  A 0.2% increase in August would lift the
year-over-year pace to 2.6%, which is the 12 and 24-month average.  It may require a a stronger increase to have a sustained impact. 
Meanwhile, investors are
trying to assess the likely impact of the Harvey storm on the larger US economy
and policies.
  Reports
suggest that the lifting of the debt ceiling may added as an amendment to the
relief package for Texas. The head of the conservative Liberty Caucus argued
against doing so, but it is not clear if it can be
blocked.  Nearly $6 bln of emergency aid, mostly for FEMA.
 The Treasury’s maneuvering around the debt ceiling included a movement of
about $400 bln into the market earlier this year, which seemed to break the
shortage of dollars that had helped lift the greenback last year.  When
the debt ceiling is lifted, those funds
will again be drained, and we suspect,
the net result could be positive for the dollar.  
Today’s employment report is
unlikely to see much impact from the
storm.
 The survey
had been conducted before it hit.
 Next week’s initial jobless claims will be among the first signs.
 Given the impact of large storms in recent years, an 80k-100k increase in
initial claims would not be surprising but then unwound in a few weeks.   
Back-of-the-envelop
calculations warn that Q3 GDP may be cut by 1% and Q4 by 0.5% before rebounding
in 2018.  
 We
do not think it impacts the Fed’s decision to begin reducing its balance sheet.
 We expect that announcement on Sept 20 to begin in Q4.  By the
December meeting, the rebuilding will be underway, and we don’t expect the GDP
impact to prevent the Fed from hiking again.  We emphasize the continued
strength of the labor market and the broader financial conditions, which have
evolved in the opposite direction than the Fed sees fit.  
There are
several large options that expire
in New York today that could impact spot.  There are 2.8 bln euros struck
between $1.1850 and $1.1870 and another 2.7 bln euros struck between $1.19 and $1.1930
that could be in play. There are also $2.4 bln struck between JPY109.90 and
JPY110.25.  There is another $765 mln struck at JPY110.50 that will be cut today. 
The Canadian dollar was consolidating its sharp gain yesterday
(1%+) recorded on the back of a stronger than expected Q2 GDP.
  The strength of the economy
has encouraged many to bring forward the rate hike penciled in for October to
next week.  The yield of the September BA futures contract is at its
highest level since the middle of 2015.  The US dollar held a few
ticks above the week’s low near CAD1.2440 from August 29.  Key support is seen at CAD1.24.

Disclaimer


Manufacturing PMIs, US Jobs, and Implications of Harvey
Manufacturing PMIs, US Jobs, and Implications of Harvey

Reviewed by Marc Chandler
on

September 01, 2017


Rating: 5

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