Sterling Strengthens… Emerging Market Currencies Slide

June 5, 2018

Sterling advanced 0.4% overnight against the dollar, buoyed by better-than-forecast British service sector and composite purchasing manager indices in May that rose to 3-month highs of 54.0 and 54.3, respectively.

The dollar also edged down 0.1% against versus the yuan and yen but climbed 0.4% and 0.3% relative to the Australian and Canadian dollars and by 0.1% vis-a-vis the euro, kiwi and Swiss franc. The dollar’s biggest appreciations occurred against selected emerging market currencies that continue to be rattled by trade war fears. The dollar went up 0.8% against the Turkish lira and Mexican peso.

The avoidance of immediate elections in Italy and Spain had produced a convergence of sovereign debt yields in recent days. But the cold reality of populists coming to power saw 10-year yields rise today by 14 basis points in Italy, 5 bps in Portugal, and 0.3 bps in Spain while German bunds slipped 3 bps and 10-year British gilts held steady.

West Texas Intermediate crude oil fell under $65 per barrel, losing 0.3% overnight, and Comex gold edged 0.2% lower.

Firmer U.S. economic data of late continue to provide a tailwind for global equities. Stocks advanced today by 1.5% in New Zealand, 1.2% in Indonesia, 0.7% in China, 0.5% in Singapore and Hong Kong and 0.3% in Japan and South Korea.

The Trump-Kim meeting in Singapore is a week away, but much diplomacy happens even sooner. Japanese Prime Minister Abe and Trump meet this Thursday, and the annual summit of group of seven leaders is on Friday and Saturday in Charlevoix, Canada.

As expected, the Board of the Reserve Bank of Australia left its official cash rate at 1.50% at this month’s monetary policy review. The OCR has been at 1.5% since a 25-basis point reduction in August 2016. Australia’s Performance of Services index went up 0.6 to a 10-month high of 55.8 in May, but softness in the labor and housing markets, as well as trade tensions, are promoting policy caution.

Euroland retail sales only rose 0.1% on month in April, which was below street estimates of a likely 0.5% increase. Sales volume recorded a mere 1.7% on-year increase.

Euroland’s service-sector purchasing managers index slid to a 16-month low of 53.8 in May. In conjunction¬† with an 18-month low announced earlier in the manufacturing PMI score, the composite PMI declined a whole point from the prior month to an 18-month low of 54.1, suggesting that real GDP in the common currency area is apt to be 0.4-0.5%.

Among the big-four economies in the euro area, Spain had the highest composite and service-sector PMIs, each of whcih rose to 3-month highs. Although Italy’s services PMI also rose to a 3-month high, its composite PMI reading of 52.9 signaled a slower improvement in business conditions than seen in Germany, France or Spain. The composite German and French PMIs were at 20- and 16-month lows in May.

The non-oil PMI readings in Saudi Arabia (53.2) and the U.A.E. (56.5) represented 3- and 4-month highs, while that for Egypt (49.2) dipped under the 50 neutrality line to a 2-month low of 49.2, signaling a mild rate of contraction.

A more significant pace of contraction was signaled by the 46.4 private PMI reading in Lebanon last month, and Standard Bank’s estimated South African private PMI fell to a 4-month low and stagnant 50 reading. Hong Kong’s private purchasing managers index likewise was depressed at 47.8 and near a 2-year low. Despite a 9-month low in Singaporean business sentiment, its private PMI advanced 1.2 points to 56.8, the best score thus far in 2018.

Japan’s composite and service-sector PMIs¬† slipped to 2-month lows of 51.7 and 51.0, implying positive but very subdued growth conditions. Japanese household spending was 1.3% weaker than a year earlier in April.

Russia’s composite PMI of 53.4 and service-sector PMI of 54.1 were also both at 2-month lows but above the 50 neutrality level.

India’s service-sector PMI fell 1.8 points, dipping under the 50 level for the first time since February with a reading of 49.6. The composite PMI for India was also a 3-month low and just 50.4.

In the U.K., same-store sales were 2.8% higher than a year earlier in May, and new car sales that month were 3.4% greater on year.

South African real GDP plunged 2.2% last quarter, the sharpest quarter-on-quarter decline since the third quarter of 2009, and on-year growth of just 0.8% constituted its weakest rise since the second quarter of 2016.

Hungarian real GDP grew 4.4% between 1Q17 and last quarter.

In addition to the non-manufacturing PMI due at 10:00 EDT, today’s schedule of U.S. data releases includes small business sentiment, the IBD/TIPP optimism index, and the Labor Department’s JOLTS report of monthly job separations, openings, and hires. Canada releases quarterly productivity and unit labor cost figures.

Copyright 2018, Larry Greenberg. No secondary distribution without express permission.



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