China's manufacturing activities contracted for the first time in 11 months, as Caixin/Markit's PMI index suggested. The report shows that the manufacturing PMI dropped -0.7 points to 49.6 in May (a reading below 50 signals contraction), compared with consensus of a milder drop to 50.1. While the sub-indices of output and new business remained in the expansionary territory, but both fell to their lowest levels since June last year. Meanwhile, the sub- indices of input costs and output prices drifted to the contractionary territory for the first time since June 2016 and February 2016, respectively. Meanwhile, the sub-index of stocks of purchases showed renewed decline. The rebound in the sub-index of stocks of finished goods suggested that companies stopped restocking as inventory levels increased.
Australian dollar was given a brief boost by retail sales data in Asian session but quickly reversed. It's trading as the biggest loser so far for the day and the week. Retail sales rose 1.0% mom in April, above expectation of 0.3% mom. However, markets seem to be more sensitive to private capital expenditure, which rose a mere 0.3% in Q1, even worse than expectation of 0.5%. Meanwhile, China's private Caixin PMI manufacturing tumbled to 49.6 in May, down from 50.3 and missed expectation of 50.2. That's the first contraction reading in 11 months. Comparing with the official PMI, the Caixin one focuses more on SMEs and indicates that these companies could be under some pressure in May which might drag down the economy ahead.
Euro shrugs off lower than expected Eurozone inflation reading and strengthens against Dollar and Sterling today. EUR/USD is heading back to 1.1267 resistance while USD/CHF is heading back to 0.9691 support. Both currency could be set to resume recent rally against the greenback. Eurozone CPI slowed to 1.4% yoy in May, down from 1.9% yoy and missed expectation of 1.5% yoy. Eurozone core CPI slowed to 0.9% yoy, down from 1.2% yoy and missed expectation of 1.0% yoy. Also from Eurozone, Germany unemployment dropped -9k in May, fewer than expectation of -14k. Unemployment rate dropped to 5.7%. German retail sales dropped -0.2% mom in April.
Sterling weakens mildly as a new poll indicates that Prime Minister Theresa May's Conservative could fall short of an overall majority in the upcoming election on June 8. According to a new modelling by YouGov for the Times, it predicts that the Conservative would get 310 seat in the parliament, down from the prior 330 seat. On the other hand, Labour would get 257 seats, up from prior 229 seat. As the required majority is 326 seats, it now means that a hung parliament is a realistic possibility.
Political uncertainty re-emerged in Europe shortly after the being improved on French presidential election. Now, it is Italy's turn with a snap election later this year becoming increasingly likely. With major parties converging to a deal on a new electoral law, an early election might take place in coming months, probably synchronizing that of German's in September. The euro reacted negatively and declined to the lowest level in more than a week before rebound. The 10-year Italian-German yield spread soared to almost the highest level in a month on concerns that the rapidly-rising Five Star Movement, the populist, euro-skeptic political party, could eventually become part of the coalition in Italy and destablize European Union again.
Dollar trades mixed in early US session after release of a batch of economic data. While Euro stays down for the day, it's already pared back much of the earlier loss. At the time of writing, Canadian dollar is the weakest major currency today as WTI crude oil dips below 50 handle again. That's followed closely by Euro and Dollar. Released in US, S&P Case-Shiller 20 cities house price rose 5.9% yoy in March. US Personal income rose 0.4% in April, spending rose 0.4%. PCE core slowed to 1.5% yoy. From Canada, current account deficit widened to CAD -14.1b in Q1. IPPI rose 0.6% mom in April, RMPI rose 1.6% mom in April.
The Chinese government has accelerated its step to guide the renminbi higher and the immediate effect is a selloff of USDCNY to the lowest level since January, 2017. Last week, the China Foreign Exchange Trade System (CFETS) confirmed that China's central bank has added a counter cyclical adjustment factor (CCAF) to the calculation of the USDCNY daily fixing rate. The government indicated that the adjustment factor would help guide market expectations and let the fix reflect more accurately China's macroeconomic fundamentals. It is appropriate for the move to be introduced in this period of time when the US dollar is weak, as, in our view, the aim of which is to stabilize renminbi, i.e. to prevent it from weakening too much. Given the lack of the details of this adjustment factor, the movement of renminbi is getting more non-transparent, as well as government-driven, rather than market- driven.
Euro tumbles broadly this week as some traders are betting on an early election in Italy, that creates some political uncertainty again. Leaders of major political parties are going to discuss, in the coming weeks, a new electoral law with a proportional system similar to the German model. And it's believed that an agreement is close between the leaders that could pull ahead the elections original scheduled in early 2018. Former Prime Minister and Democratic Party leader Matteo Renzi, who's desperate to seek a come back after the referendum defeat, is pushing for an early election as soon as in September, at the same time as Germany's own election. But ultimately, the move would also require President Sergio Mattarella's decision to dissolve the government. After all, the markets are starting to price in the development.
It's reported that North Korea launched another ballistic missile test today, the 9th this year. It's also the third week in a row that missiles were launched. Japanese Prime Minister Shinzo Abe responded and said that "as we agreed at the recent G7, the issue of North Korea is a top priority for the international community." And, "working with the United States, we will take specific action to deter North Korea." Nonetheless, reactions in the forex markets are muted as traders were getting bored with such news. In addition, holidays in China, Taiwan, UK and US also contributes to the lack of volatility. Meanwhile, the Korean KOSPI closed down -0.1% after failing to hold on to initial gains.
The biggest development last week was the sharp selloff in the British Pound on surging uncertainty over the election in June. FTSE 100 jumped to record high, riding on Sterling weakness. It was believed that the Conservative Party would have a landslide victory back in April when Prime Minster Theresa May called for a snap election. Back then, the Conservative had over 20 points lead over Labour. However, according to the latest YouGov poll showed that the margin narrowed sharply to just 5pts. The news sent GBP/USD to as low as 1.2774 before closing at 1.2794, comparing to 1.3047 high in May. EUR/GBP jumped to as high as 0.8750 before closing at 0.8725, comparing to this month's low at 0.8383. GBP/JPY also dropped sharply to as low as 142.11 before closing at 142.44, comparing to this month's high at 148.09.
The free fall in the Pound is seen as a result of heightened uncertainty over the election in June. Latest YouGov poll published late on Thursday showed that 43% voters plan to vote for Prime Minister Theresa May's Conservative Party. That compares to the support for Labour Party at 38%. That is, just a mere 5% lead. Back in April when May announced the snap election, it's believed that the Conservative would have a landslide victory due to the over 20 point lead. A less than strong victory will weaken May's stance in Brexit negotiation with EU.
Developments in the financial markets in the last 24 hours were rather mixed. Firstly, oil prices reversed after the announcement of extension of production cut from oil producers. WTI crude oil dropped to as low as 48.21, comparing to this week's high at 52.00. Canadian Dollar followed lower but the sell off is limited so far. Secondly, US equities market strengthened overnight with S&P 500 gaining 0.44% to 2415.07. NASDAQ also rose 0.69% to close at 6205.26. Both indices made new record highs. DOW closed at 21082.95, 0.34%, inches below record high at 21169.11. US yields, on the other hand, stays soft with 10 year yield closed down -0.011 at 2.255. Gold is steady in range around 1250. Meanwhile, in the currency markets, Sterling plunged broadly after the downward revision in Q1 GDP released yesterday. Also, traders continue to lighten up positions as UK election in June approaches. Yen jumps broadly as Asian markets are in mild risk aversion. Dollar recovers but there is no sign of reversal yet as dollar index struggles below 97.50.
Dollar recovers in early US session after solid job data. Initial jobless claims rose 1k to 2.34k in the week ended May 20, below expectation of 238k. The four week moving averaged dropped to 235k, down from 241k. The average stands at the lowest level since 1973. Continuing claims rose 24k to 1.923m in the week ended May 13. Also from US, trade deficit widened to USD -68.0b in April. Wholesale inventories dropped -0.3% in April. Released earlier today, UK GDP growth was revised lower to 0.2% qoq in Q1, index of services rose 0.2% 3mo3m in March, BBA mortgage approvals dropped to 40.8k in April.
The market was disappointed over the FOMC minutes for the May meeting. While the minutes should be considered as a confirmation of a rate hike in June, it raised the uncertainty over the future rate hike path. The members appeared divided over the inflation outlook. While one camp was concerned over the impact of falling unemployment on inflation, another camp remained focused on the downside risk to inflation. Meanwhile, it is getting more likely that the balance sheet reduction might begin 'this year'.
Dollar stays generally soft as FOMC minutes delivered little surprise overnight. Fed is generally still expected to hike interest rate again in June. The plan for shrinking the balance sheet was outlined too. US equities were firm with DOW, S&P 500 and NASDAQ heading back to record highs. But treasury yields and Dollar didn't follow. The Dollar index is trading soft at around 96.9 at the time of writing as renewed strength in seen in EUR/USD in Asian session. The Dollar index is still on course for medium term fibonacci level at 96.46. Meanwhile, Canadian dollar jumps overnight as markets responded positively to BoC statement and strength in oil price.
Bank of Canada left the policy rate unchanged at 0.5% in May. Canadian dollar rallied to a 1-month higher against the US dollar after the announcement. Although the decision had been widely anticipated, traders were thrilled as policymakers acknowledged the strength in both global and domestic growth developments. The central bank also noted its expectations of 'very strong growth in the first quarter'. Yet, the abovementioned hawkishness was offset by concerns over subdued wage and price growth, leaving the overall statement neutral.
Dollar is trading in tight range today with mild strength against Japanese Yen and Swiss Franc. Markets are looking into today's FOMC minutes to solidify the expectation of a June Fed hike. Euro, despite the retreat against Dollar and Sterling, stays firm with near term bullish outlook. Meanwhile, the financial markets elsewhere are generally steady. European indices are weighed down mildly by news of Moody's downgrade of China, but loss is very limited. US futures are pointing to a flat open. Gold hovers in tight range around 1250.
US markets closed mildly higher overnight as investors were relieved that US President Donald Trump's first budget plan contained no surprise. DJIA closed up 43.08 pts, or 0.21% at 20937.91. S&P 500 gained 4.4 pts or 0.18% to close at 2398.42. Nikkei follows in Asian session and is trading up 100 pts at the time of writing. US 10 year yield also ended up 0.031 at 2.285. Dollar recovered as markets firmed up their expectation of a June Fed hike. Fed fund futures are pricing in 83.1% chance of that. In other markets, gold dips mildly but is holding above 1250 handle for the moment. WTI crude oil's recent surge is still in progress and is holding above 51.50. Focus will turn to FOMC minutes and BoC rate decision today.
Euro remains firm against most major currencies but is outshone by commodity currencies today. Solid economic data from Eurozone lifts sentiments with major European indices trading higher at the time of writing. US futures also point to higher open. Meanwhile, Dollar and Sterling remain the weakest major currencies for the week. The Greenback will need something drastic from either US President Donald Trump or FOMC minutes to halt it's decline against Euro and Swiss Franc. In other markets, gold is trading flat in tight range around 1260. WTI crude oil is losing some upside momentum but stays firm around 51.
Euro stays firm against Dollar and Sterling in Asian session but is losing some momentum against commodity currencies. Strength of the common currency is built upon optimism on Eurozone's economic outlook. And Euro will look into a string of data for further strength today, including PMIs and German IFO business climate. Meanwhile, Sterling stays as the weakest major currency as markets UK election and Brexit negotiation with EU are both approaching. Dollar, on the hand, stays soft too and didn't follow the rebound in stocks and yield. US President Donald Trump's first budget will also be a major focus today but it's unlikely to be inspirational.