- Market sentiment has improved from a variety of factors
- Powell’s comments are boosting equity markets and weighing on the dollar
- Republican Senators warned the White House that Congress will act to block Mexico tariffs
- The World Bank cut its global growth forecast for 2019, citing the slowdown in trade
- EUR is trading at its highest level since April 18 ahead of the ECB meeting tomorrow; let’s not forget about Italy
- UK PMIs for May point to stagnation
- Philippines May CPI rose 3.2% y/y; Poland is expected to keep rates steady at 1.5%; Colombia May CPI is expected to rise 3.30% y/y
The dollar is mostly softer against the majors as Powell comments continue to weigh. Kiwi and Nokkie are outperforming, while Swissie and yen are underperforming. EM currencies are mostly firmer. TRY and CZK are outperforming, while THB and ZAR are underperforming. MSCI Asia Pacific was up 1%, with the Nikkei rising 1.8%. MSCI EM is up 0.4% so far today, with the Shanghai Composite flat. Euro Stoxx 600 is up 0.6% near midday, while US futures are pointing to a higher open. 10-year UST yields are flat at 2.12%, while the 3-month to 10-year spread is steady and stands at -21 bp. Commodity prices are mixed, with Brent oil up 0.3%, copper down 0.1%, and gold up 0.9%.
Market sentiment has improved from a variety of factors. Fed Chair Powell signaled willingness to act appropriately to sustain the economic expansion, noting the Fed is “closely monitoring” trade developments. In that regard, markets got bullish after Mexican officials played up 80% chance of avoiding US tariffs.
Powell’s comments are boosting equity markets and weighing on the dollar. DXY has retraced about half the March-May rally. The 96.745 low from April 12 is key, as a break below would set up a test of the March low near 95.74. In between lies the 200-day moving average near 96.51.
Republican Senators warned the White House that Congress will act to block Mexico tariffs. Senators told White House officials that there could be a disapproval vote if Trump moves forward with the tariffs. However, they added that this time, there is enough bipartisan support to override a veto. This is one of the few positive trade developments we’ve seen recently.
During the North American session, May ADP (185k expected) and ISM non-manufacturing PMI (55.4 expected) will be reported. The Fed also releases its Beige Book report. Clarida, Bowman, and Bostic speak today. Powell has now set the tone for Fed officials to acknowledge the possibility of cutting rates. We think that option was always there, but the subtle shift in language from steady rates has gotten the attention of the markets.
The World Bank cut its global growth forecast for 2019, citing the slowdown in trade. Growth is now seen at 2.6% vs. 2.9% forecast in January. The bank added that risks are skewed “firmly” to the downside. “Heightened policy uncertainty, including a recent re-escalation of trade tensions between major economies, has been accompanied by a deceleration in global investment and a decline in confidence,” it warned. This is more pessimistic that the IMF (3.3%) and the OECD (3.2%). We simply cannot get bullish EM with this global backdrop.
Final eurozone services and composite PMIs were reported. Services PMI came in at 52.9 vs. 52.5 flash, pushing the composite PMI up to 51.8 from 51.6 flash. Germany improved slightly from the flash reading, while France worsened slightly. Spain worsened slightly from April, with its composite reading falling to 52.8. On the other hand, Italy composite rose to 49.9 from 49.5 in April. Eurozone also reported April retail sales (-0.4% m/m) and PPI (2.6% y/y).
The euro is trading at its highest level since April 18 ahead of the ECB meeting tomorrow. Break of $1.1320 is needed to set up a test of the March high near $1.1450. We think it is risky to take the single currency higher when Draghi is likely to push back hard. We note that over the past 8 ECB decision days, the euro has weakened in 6 of them. The ECB is likely to announce generous terms for the autumn TLTRO and may tweak its forward guidance, along with downward revisions to the staff forecasts.
Oh, and let’s not forget about Italy. As we went to press, reports are that the EU has triggered the disciplinary process against Italy for its debt trajectory. The EU has not made sufficient progress and is subject to an initial penalty of up to EUR3.5 bln. This is just the first step in the process, but we expect Salvini to come out swinging today.
UK PMIs for May point to stagnation. Services PMI bucked the trend of sub-50 readings for May, coming in at 51.0 vs. 50.5 expected. Earlier this week, construction PMI came in at 48.6 vs. 50.6 expected and manufacturing PMI came in at 49.4 vs. 52.2 expected. This allowed the composite to remain steady at 50.9. Markit official warned that taken together, the May PMIs show the UK economy “close to stagnation.”
Philippines May CPI rose 3.2% y/y vs. 2.9% expected and 3.0% in April. Inflation accelerated for the first time since September 2017 and is back in the upper half of the 2-4% target range. Central bank Governor Diokno promised more easing ahead and we believe him. Next policy meeting is June 20, and another 25 bp cut to 4.25% had been expected before this CPI print. It will be a close call.
Poland central bank is expected to keep rates steady at 1.5%. Governor Glapinski has said rates are unlikely to go up during his term, which ends in 2022. Markets do not believe him, as consensus sees the first hike by Q3 2020. May CPI came in at 2.3% y/y vs. 2.4% expected and 2.2% in April. Inflation is the highest since November 2017 but still in the bottom half of the 1.5-3.5% target range.
Colombia May CPI is expected to rise 3.30% y/y vs. 3.25% in April. If so, inflation would remain well within the 2-4% target range. The central bank has signaled that rates are on hold for the time being due to growing headwinds on the economy. Next policy meeting is June 21, no change is expected then.