More News, Same Story, Dollar Remains Firm

More News, Same Story, Dollar Remains Firm

  • After a few sessions of light news, the flash Chinese Caixin flash manufacturing PMI and EMU PMIs provided new economic insight
  • The euro recovered toward $1.1150, with the help of ECB’s Nowotny playing down the urgency of expanding or extending the asset purchase program
  • The North American session features US Markit manufacturing PMI and another speech by the Fed’s Lockhart
  • The outcome of yesterday’s key congressional vote in Brazil was, all things considered, favorable
  • South Africa reported August CPI at 4.6% y/y vs. 5.0% in July, slightly below expectations; SARB meets and is likely to keep rates steady at 6%

Price action:  The US dollar is mostly firmer against the major currencies.  The EUR is outperforming, while the Aussie and sterling are underperforming.  The euro continues to trade heavily, making a marginal new low for the move near $1.11 before seeing a slight bounce.  Sterling broke below its 200-day MA and is trading at its lowest level since September 8 at just below $1.53.  Dollar/yen continues to trade on both sides of 120.  EM currencies are mostly weaker.  The CEE currencies are outperforming again while KRW, MYR, IDR are underperforming.  MSCI Asia Pacific ex-Japan fell for a third straight day, down 2.4% even as Japan markets remain closed for holiday (they reopen tomorrow).  China stocks were lower, with the Shanghai Composite down 2.2% and the Shenzen Composite down 0.8%.  The Dow Jones Euro Stoxx 600 is up 0.7% around midday, while S&P futures are pointing to a lower open.  The US 10-year yield is up 1 bp to 2.15%, while European bond markets are mostly softer.  Commodity prices are mixed, with oil prices up around 0.7%.

  • After a few sessions of light news, the flash Chinese Caixin flash manufacturing PMI and EMU PMIs provided new economic insight.  But the macro-picture has not changed very much.  China’s economy has not bottomed while European growth appears to remain largely steady.  Asian equities fell, following the US slide and the disappointing Chinese news, but after a soft start, European bourses turned higher.  European bond yields are mostly 2-3 bp higher.
  • The euro recovered toward $1.1150, with the help of ECB’s Nowotny playing down the urgency of expanding or extending the asset purchase program.  Draghi is expected to reiterate the flexibility of the current program before the European Parliament today, while the Bundesbank’s Weidmann can be expected to resist such notions when he speaks to a business association in Germany later today.  The euro is consolidating after approaching $1.11 in Asia.  Key chart support is seen near $1.1080.
  • Sterling can’t get out of its own way and extended its recent losses to poke briefly through the $1.53 level.  The dollar fell to almost JPY119.60 in Asia but rebounded to JPY120.30 in the European morning.  Of the majors, the Antipodean were hit the hardest on the weak Chinese data, while the Canadian dollar is faring better, perhaps with the help of firmer oil prices in the wake of the 3.7 mln barrel inventory draw down reported by API.
  • The flash Caixin manufacturing PMI fell to 47.0 from 47.3.  Many expected a small rise.  The details were poor.  It is the lowest reading in the short history of this time series (6 1/2 years) and the seventh consecutive reading below 50.  New orders fell to 46.0 from 46.7.  Exports orders fell to 45.8 from 46.6.  There is some risk that the focus on small and medium Chinese companies means that the Caixin survey does not pick up the government support for the larger state-owned enterprises.  That data will be released in a week’s time, ahead of the beginning of the holidays on October 1.
  • The flash eurozone PMI was largely in line with expectations.  The manufacturing reading was 52.0, precisely where the Bloomberg consensus had it.  It is down from 52.3 and is the third consecutive decline, though the three-month average in September was unchanged from June.  The service PMI was a touch disappointing at 54.0 rather than 54.2 (54.4 in August).  The three-month average is also unchanged from June.  This suggests EMU growth remained around 0.4% in Q3.
  • The interesting development in the PMI was that while Germany disappointed, France offered a pleasant surprise, and that is not something we have been able to say much this year.  France’s manufacturing PMI rose to 50.4 from 48.3.  It is the highest since June.  The consensus was for a small rise to 48.6 from 48.3.  The service PMI rose to 51.2 from 50.6.  The consensus was for a 51.0 reading.  Germany, on the other hand, missed expectations on both reports.  The manufacturing PMI slipped to 52.5 from 53.3, just missing the consensus of 52.6.  The service PMI eased to 54.3 from 54.9.  The consensus was for 54.6.  Still, there is no reason to make a big deal of the German miss.  Orders continued to rise, and the backlog was the largest in four years, suggesting no meaningful interruption of production.
  • Japan’s markets re-open tomorrow for the first time this week.  Japan will report the manufacturing PMI, but the highlight is the CPI, where the core rate (excluding fresh food) is expected to slip back into negative territory for the first time since April 2013.  The deputy economic minister suggested in a Singapore interview that the BOJ’s goal of 2% inflation (by next September) may be delayed by the impact of China’s economic slowdown.
  • The North American session features US Markit manufacturing PMI and another speech by the Fed’s Lockhart.  Lockhart spoke earlier this week and is one of the 13 (out of 17) Fed officials that recognize that a hike this year is still appropriate.  Yellen speaks tomorrow at Amherst College, and it is her first public appearance since last week’s FOMC meeting.  Separately, Canada reports July retail sales today.  A 0.7% rise is expected after a 0.6% gain in June and a 0.9% gain in May.
  • The outcome of yesterday’s key congressional vote in Brazil was, all things considered, favourable.  Congress was trying to overturn a series of vetoes that would damage the government’s feeble attempt at fiscal consolidation.  Of the 32 vetoes, 26 were upheld, including an important one on retirement.  However, the most important measures, which would increase the salaries of the Judiciary by some 60% over the next few years, was not voted.  As such, the worst case scenario was averted, but by no means are we in the clear.  BRL may see some slight relief near-term, but is still likely to set new all-time lows in the coming days as EM sentiment remains hugely negative.
  • South Africa reported August CPI at 4.6% y/y vs. 5.0% in July, slightly below expectations.  The central bank meets later today and is expected to keep rates steady at 6.0%.  A very small handful expects a 25 bp hike to 6.25%.  Since CPI came in close to the center of the 3-6% target range, we think steady rates are warranted.  SARB just hiked 25 bp at its last meeting in July, and the weak economy argues against an aggressive tightening cycle.  August PPI is expected to rise 3.5% y/y vs. 3.3%, and will keep the SARB on alert in the coming months.
  • In another sign of weakness of Asia economies, Philippines’s trade balance posted the largest deficit since early 2014.  The deficit widened to -$1.2 bln in July, much wider than the -$236 mln deficit expected.