Dollar Remains Under Pressure as Markets Celebrate Strong June PMIs

  • Global equities took a sharp but short-lived hit from what appears to have been a misinterpretation of US trade advisor Navarro’s comments about China; the dollar remains under pressure
  • The regional Fed manufacturing surveys for June continue to roll out; Brazil central bank releases its minutes
  • Eurozone and UK flash PMI readings for June were better than expected; Hungary is expected to keep policy steady
  • Japan and Australia June PMI readings improved

Global equities took a sharp but short-lived hit from what appears to have been a misinterpretation of US trade advisor Navarro’s comments about China. After Navarro said the deal was “over,” President Trump had to clarify that the “the China Trade Deal is fully intact.” S&P 500 futures fully recovered from a near 2% intrasession decline and is trading higher now. The dollar appreciated on the episode, though the move was less dramatic than in stocks. The lesson here: markets remain very sensitive to US-China headlines and, at least for this episode, the knee-jerk reaction is to sell stocks and (to a lesser extent) buy dollars. Elsewhere, China and India held talks and agreed to deescalate tensions along their border.

The dollar remains under pressure. Market sentiment has been boosted by stronger than expected PMI readings across the globe, as well as some easing of geopolitical tensions. DXY is trading at the lowest level since June 16 and a break of the 96.489 is needed to set up a test of the June 10 low near 95.716. The euro is building on its gains after finding support just below the $1.12 area. Break of the $1.1325 area would set up a test of the June 9 high near $1.1420. Sterling is lagging and so the EUR/GBP cross is trading near recent highs of 0.907. USD/JPY continues to trade in narrow ranges around the 107 area, but continued risk-on sentiment should push the pair back above 108.

AMERICAS

The regional Fed manufacturing surveys for June continue to roll out. Richmond Fed reports today and is expected at -2 vs. -27 in May. Kansas City reports Thursday and is expected at -7 vs. -19 in May. Last week, the Philly Fed survey came in at +27.5 vs. -21.4 expected and -43.1 in May while the Empire survey came in at -0.2 vs. -29.6 expected and -48.5 in May. Markit preliminary June PMI readings will also be reported today. Manufacturing is expected at 50.0 vs. 39.8 in May, while services is expected at 48.0 vs. 37.5 in May. May new home sales (2.7% m/m expected) will also be reported today, while Bullard is scheduled to speak.

Chicago Fed National Activity Index for May came in at +2.61 vs. -10.0 expected. This was the first positive reading since February, but the 3-month average remains deep in negative territory at -6.65 vs. -7.50 n April. This is nearly ten times the -0.7 recession threshold. Another Q1 GDP revision will come out Thursday, but it’s expected to remain steady at -5.0% SAAR. This is old news. Looking ahead, the Atlanta Fed’s GDPNow model estimates Q2 GDP at -45.5% SAAR, while the NY Fed’s Nowcast model has Q2 at -19.03% SAAR and Q3 at -1.89% SAAR. The Atlanta Fed is likely overstating Q2 contraction a bit and the NY Fed understating it, and we suspect the truth is somewhere in between. Note that Bloomberg consensus sees -34.7% SAAR in Q2 and +20.0% SAAR in Q3.

Brazil central bank releases its minutes. COPOM cut rates 75 bp to 2.25% last week and signaled potential for one last cut. CDI market is pricing in solid odds of a 25 bp cut to 2.0% at the next policy meeting August 5. Its quarterly inflation report will be released Thursday. Mid-June IPCA inflation will also be reported that day and is expected at 1.86% y/y vs. 1.96% in mid-May. If so, inflation would be the lowest since January 1999 and further below the 2.5-5.5% target band.

EUROPE/MIDDLE EAST/AFRICA

Flash June PMIs across the euro area came in stronger than expected. For the region as a whole, the manufacturing PMI came in at 46.9 vs. 45.0 expected and 39.4 in May, while the services PMI came in at 47.3 vs. 41.5 expected and 30.5 in May. This drove the composite up to 47.5 vs.43.0 expected and 31.9 in May, showing the that re-opening recovery in in full swing. The French and German June composite readings were 51.3 (46.8 expected) and 45.8 (44.4 expected), respectively. Of note, both the manufacturing and services readings for France came in above 50. Final readings that include Italy and Spain will reported next month, with manufacturing July 1 followed by services and composite July 3.

UK PMIs for April also showed a large upside surprise. The services flash reading for June came in at 47.0, well above the 40 expected and the dismal 29 in May. The manufacturing reading rose to slightly expansionary territory of 50.1, leading the composite to 47.6 vs. 41.2 expected and 30.o in May. Good very good news, especially since much of the re-opening is still to come.

National Bank of Hungary is expected to keep policy steady. The bank just started asset purchases in May. However, the bank has cancelled several auctions in June despite rising bond yields. Since the end of May, the 10-year yield has risen around 35 bp and the 15-year yield by around 57 bp. We hope the bank gives some more clarity as to what it wishes to accomplish with its QE.

ASIA

Japan reported preliminary June PMI readings. Manufacturing fell to 37.8 from 38.4 in May, but services improved to 42.3 from 26.5 in May and pulled the composite up to 37.9 from 27.8 in May. May department store sales were also reported, plunging -65.6% y/y vs. -72.8% in April. However, early data suggest improvement to -27% y/y in the first half of June. The data would seem to support the Cabinet Office’s recent upgrade to its economic assessment where it noted that the economy remains in “an extremely severe situation” but has “almost stopped deteriorating.” It added that businesses see signs of an improving situation, and private consumption is “showing movements of picking up,”

Australia reported preliminary June PMI readings. Manufacturing rose to 49.8 from 44.0 in May, services improved to 53.2 from 26.9 in May, and the composite rose to 52.6 from 28.1 in May. This is the highest reading for the composite since December 2018 and the first time above 50 since January. Preliminary May trade data were also reported, with exports -4% m/m and imports -9% m/m. A drop in shipments of coal and gas was cited as the major factor in the export contraction, though ongoing strength in iron ore shipments was noted. For now, the RBA’s fairly upbeat outlook is playing out, but it will likely be tested in the coming months.