At first sight, EMU May PMI’s were close to expectations. The composite measure eased slightly from 54.1 to 53.3 (vs 53.5 expected), but still suggests solid growth. The dichotomy between a further contraction in manufacturing (44.6 from 45.8) and strong services growth continues (55.9 from 56.2). This divergence was also visible in pricing behavior. According to S&P global, average prices for goods and services rose at the slowest pace in 25 months. However, prices rises remain high by historical standards. Especially the services sector continues reporting higher pricing power amid resurgent demand while goods producers see reducing input costs and demand for discounts. Still, service sector input costs continue to rise sharply, often due to higher wage an salary costs. In its comment, HCOB chief economist Cyrus de la Rubia concludes that ‘The European Central Bank will have a headache with the PMI data. This is because selling prices in the services sector actually rose more than in previous month. …. This upward move that can still be observed here is keeping the central bank from taking an interest rate pause’. Companies continue to hire, even in the weakening industrial sector. As said, the EMU PMI’s didn’t provide a spectacular surprise. However, the combination of a healthy labour market and ongoing price pressures in the services sector was enough to further extend recent rise in core European and US bond yields. German yields are trading off the intraday top levels, but still add about 2-3 bps across the curve. US Treasuries underperform with additional yield gains between 5.5 bps (2-y) and 2 bps (30-y). Higher yields and a more inverse yield (US) curve this time triggered a correction on global equity markets (Eurostoxx 50 -0.9%, S&P -0.4%). However, recent highs remain within reach. At the time of finishing this report, the US Composite PMI is released at a stronger than expected 54.50, with services showing solid growth (55.1) while manufacturing drifts below the 50 boom-or-bust level (48.5). Yields in a first reaction gain marginally. The dollar trades little changed.
On FX markets, higher yields and a risk-off favors the dollar, even as the negotiations on raising the debt ceiling didn’t yield any result yet. EUR/USD slipped from the 1.0810 area to trade near 1.078. DXY rebounded nearing the recent top levels in the103.63 area. Despite higher core yields, yen losses remain negligible. Still, USD/JPY (currently 138.5) tries to break above the 138.75 resistance, touching the highest levels in about six months. Sterling showed somewhat of a bumpy intraday pattern. The UK currency was hit around the time of the publication of a weaker than expected UK PMI (composite 53.9 from 54.9). EUR/GBP briefly jumped to the 0.8715 area, but sterling soon recovered the post-PMI loss as UK yields still rose faster than their EMU counterpart. Governor Bailey in a hearing before Parliament mainly repeated the message for the May policy meeting (further tightening is need if inflation persists). EUR/GBP currently again trades in the 0.8695 area, counting down to tomorrow’s key April inflation data.
News & Views
The Saudi energy minister, prince Abdulaziz bin Salman, lashed out at oil short-sellers again. At the Qatar Economic Forum (Doha), bin Salman told speculators they will get burned whilst referring to OPEC’s decision back in April. The oil cartel then delivered a surprise output cut of more than 1m barrels a day. Brent oil prices soared from sub $80/b to around $87 shortly thereafter. But ongoing recessionary worries and tepid Chinese growth following the end of zero-Covid (more than) erased those gains. At the same time there are serious doubts whether some OPEC+ members including Russia are at all abiding by the production cuts. The price of a barrel of Brent ekes out a tiny gain after bin Salman’s comments, selling at around $77/b currently. OPEC+ will meet on June 3-4.
The Hungarian central bank proceed its cutting cycle today by lowering the overnight collateralised lending rate serving as the top of the interest rate corridor by 100 basis points to 19.5 percent. The key decision however was that it also cut the overnight deposit tender (and de facto policy) rate from 18% to 17%. The base rate was left unchanged at 13%, a level which it considers high enough to fight inflation and expects to stay there for a prolonged period. The Hungarian central bank said it is to continue the convergence of both rates, provided the improvement in risk perceptions vis-à-vis Hungarian assets, the forint in particular, persists. The MNB favours a cautious and gradual approach in doing so (a monthly 100 bps reduction through September?!). The forint reacted stoic to today’s decision as markets were already pricing the cut for quite some time. The forint is holding strong near EUR/HUF 374.