Markets
The EMU composite PMI for April rose from 53.7 to 54.4, indicating that growth momentum in the region improved further at the start of the second quarter. However, growth has become increasingly unbalanced. The headline manufacturing PMI unexpectedly declined from 47.3 to 45.5. The services headline measures improved further from 55 to 56.6. According to S&P global, the outperformance of the services sector relative to manufacturing was the widest since early 2009. Overall orders growth improved, but this also masked a decline in manufacturing being more than counterbalanced by rise in services orders. Employment growth slowed in manufacturing but accelerated to the fastest pace since 2007 for services. Similar narrative for price trends as manufacturing input costs declined while services costs continued to raise sharply. Average prices charged for goods and services continued to rise at a pace above the long-term average. The reaction on European interest rate markets initially was remarkably moderate. European yields swapped a minor decline for a small daily rise. Even so, the ongoing rise in EMU services costs (wages) and final prices for consumers suggests persistent core inflation. The internal debate within the ECB MPC is ongoing with April CPI data and the ECB lending survey to published early May providing key data evidence. That said, we consider the current pricing of a 30% chance of a 50 bps hike rather than a 25 bps a steps being an ‘underpricing’. US bonds outperformed Europe going into the release of the US PMI’s. However, the US manufacturing PMI (50.4 from 49.2) as well as the services gauge (53.7 from 52.6) surprised on the upside. The impact of the ‘financial instability’ in March apparently stays limited for now. US yields after the releases try to erase negative daily prints (2-3-bps higher). German yields still take the lead gaining 4/5 bps. Equities again show no clear trend today. The Eurostoxx 50 trades marginally higher (0.2%). US indices also opened mixed/little changed. The break lower of the oil price slowed after two days of sharp losses (Bent $81.50/b).
On FX markets, EUR/USD after a brief dip early in Europe, currently trades little changed (at 1.096). DXY (101.7) lost a few ticks in a daily perspective. The yen outperformed going into the US PMI but currently rebounds to 134.3.(from 133.6 earlier today). This morning’s softer than expected UK retail sales were the trigger from quite a striking underperformance of sterling. EUR/GBP rallied from the 0.882 area to currently trade near 0.8855. UK PMI’s brought a similar message as was the case in EMU (manufacturing easing from 47.9 to 46.6, services gaining from 52.9 to 54.9). The report initially didn’t change the intraday dynamics.
News & Views
French finance minister Le Maire said the electricity price caps will remain in place beyond 2023, arguing that power prices haven’t normalized yet. The cap will likely be phased out over a two-year period by 2025. Prices soared in the wake of the Russian invasion, as did those for natural gas. But because the latter have lowered significantly in recent months, Le Maire said it will remove gas price caps at the end of 2023. Dutch TTF gas futures today trade below €41/MWh, around the lowest since July 2021.
China’s central bank hinted that it may start to gradually withdraw some of the stimulus measures introduced during the pandemic. Zou Lan, head of the monetary policy department said that most of the structural tools introduced were temporary in nature and will fade out as the economy begins recovering and credit demand picks up. These structural tools include relending programs and target specific areas of the economy. They were increasingly relied on to deliver economic stimulus rather than the blunt conventional measures such as the PBOC’s one-year policy loans and the reserve requirement ratio. The rates of the loans offered by the central bank often carried interest rates at around 1.75%, lower than the one-year policy rate of currently 2.75%.
