The Euro Stalled Near Its Best Level since April 2022 Ahead of ECB's Decision

Overview: Without making a commitment, the Federal Reserve opened the door to a pause in its tightening cycle and the market has concluded it is over. The dollar slumped to new lows for the move against sterling (and the Mexican peso), while euro stalled as it approached last week's high, which was the best level since April 2022. The dollar remains soft against most of the G10 currencies, today. The Norwegian krone is leading after the 25 bp hike was delivered. The euro is little changed ahead of the ECB meeting results.

China's markets re-opened for the first time this week and the CSI 300 eked out a small gain, after a disappointing Caixin manufacturing PMI. Other bourses in the region were mixed. The Stoxx 600 is about 0.6% lower, while European bank shares are off for the third consecutive session. US equity futures are narrowly mixed. Benchmark 10-year yield are 1-5 bp points firmer in the Europe and the 10-year US Treasury yield is a few basis points higher near 3.37%. The two-year yield is up five basis points to 3.85%. The combination of the weaker dollar and lower rates lifted spot gold to nearly $2063, a new high to approach the record high set in August 2020 (~$2075.50). The gains have been unwound and gold is trading below $2040 in Europe. Oil has been on a wild ride. The June WTI contract plunged to $63.65 today after settling at $68.60 yesterday. It has rebounded dramatically and reach almost $69.50 were new selling materialized.

Asia Pacific

China's markets re-opened, having been closed for the first three sessions this week for the May Day holidays. Over the three sessions, the US bank stress turned more acute, rates fell, and the dollar weakened against the most of the G10 currencies. The Reserve Bank of Australia (and Malaysia) surprised with rate hikes, while the Fed's hike was widely anticipated. The Caixin manufacturing PMI slipped below the 50 boom/bust level (to 49.5), where it spent the August 22-January 23. The "official" manufacturing PMI, reported before the holiday, also fell back below 50 in April (49.2 vs. 51.9). The weakness in manufacturing is not unique to China. Japan, the eurozone, the UK, and Australia's April manufacturing PMI was also below 50. The US and Canada was the notable exceptions, with both national readings at 50.2. Tomorrow Caixin reports the services (may have eased a little) and the composite PMI.

Australia's March trade surplus was larger than expected, rising to A$15.3 bln, the largest since last June. Exports rose 4% in the month after a 3% decline in February. Imports rose by 2% after a 9% fall in February. Australia recorded a A$40.2 trade surplus in Q1 23. The trade surplus in Q1 22 was A$29.3 bln. Note that Australia's two-way trade with China in March (~A$27.8 bln) was more than its two-way trade with its next four largest trading partners combined (Japan, South Korea, US, Singapore). Separately, after surprising the market with a quarter-point rate hike earlier this week, the RBA will issue a monetary statement first thing tomorrow. It may provide more context for the central bank's forecasts. While it may keep the door open to additional hikes, the market again thinks that the RBA's monetary tightening cycle is over. 

After reaching nearly JPY137.80 on Tuesday and reversing lower, the dollar was dragged lower by falling US rates and fell to near JPY134.70 yesterday. The losses were extended to JPY134.15 today with Tokyo markets closed (re-open Monday). The greenback found bids there and stabilized in the European morning above JPY134.50. A move back through JPY135 would help lift the technical tone. A close below the JPY134.30 area, where the 20-day moving average is found, warns of a deeper pullback. The dollar has not closed below this moving average in nearly a month. The Australian dollar remains confined to the range set on Tuesday (~$0.6620-$0.6715). It approached $0.6700 were selling were lurking and sent back to the around $0.6660 were it seemed to find support in the European dealings. Note that there are options for A$755 mln at $0.6630 that expire tomorrow, and another set for about A$735 mln at $0.6600 that also roll off before the weekend greenback settled near CNY6.9125 at the end of last week before China's extended holiday. It opened today slightly below CNY6.8990 and slipped to around CNY6.8925 before recovering steadily to reach near CNY6.9200. The reference rate was set at CNY6.9054. The median estimate in Bloomberg's survey weas for CNY6.9026. The weak PMI readings have spurred speculation that the rate cuts are under consideration.

Europe

Ahead of the outcome of the ECB meeting, the final April service and composite PMI were reported. The eurozone's manufacturing PMI may be below 50 but the service and composite PMI were well above. The service PMI has been improving for the past five months and stood at 56.2 down from the initial estimate of 56.6 in April, up from 55.0 in March. The composite PMI is at 54.1, rather than the flash estimate of 54.4, and up from 53.7 in March. It is the highest since last May. Germany's composite 54.2 from 53.9 flash estimate (52.6 in March), but France disappointed. The final reading of its composite was 52.4 from 53.8 initial estimate and 52.7 in March. while the continued outperformance of the periphery was underscored by Italy and Spain's reports. Italy's service PMI rose to 57.6 (expected 56.5) from 55.7 and the composite PMI edged up to 55.3 from 55.2. Spain's PMI was somewhat less impressive but still strong. Its service PMI stands at 57.9, down from 59.4 and its composite PMI eased to 56.3 from 58.2.

Germany reported a 16.7 bln March trade surplus, up a 600 million euros from February. Its trade surplus last March was 4 bln euros and its March 2019 it stood at almost 20.5 bln euros. These are seasonally adjusted numbers. On an unadjusted basis, it had already been reported that non-EU exports rose 8.1% year-over-year in March, led by shipments to India (38.1% year-over year), Turkey (36.5%), Brazil (34.5%). But the base is low. Exports to the US were more than them all combined (~14.7 bln euros), a 6.2% gain from March 2022. Exports to China (~9.0 bln euros) was almost 14% less than a year ago. Overall, exports fell 5.2% in March and imports slumped 6.4%. 

The UK's final April PMI was better than the flash estimates. The service PMI rose to 55.9 rather than the initial estimate of 55.0. It was at 52.9 in March. The composite stands at 54.9, up from the 53.9 flash report and March's 52.2. It is the best since last April. The construction PMI edged up to 51.0 from 50.7. The Bank of England meets next week, and swaps market is confidence of another quarter point hike that will bring the base rate to 4.50%. It expects the terminal rate to be between 4.75% and 5.0%.

Norway's Norges Bank already delivered its 25 bp hike (to 3.25%) and now it is the ECB's turn. Norway signaled another hike next month (June 15). There is little doubt in the swaps market that the ECB will raise its key rates by a quarter point today. The central bank signaled another hike next month (June 15). The market has it nearly fully discounted. That would put the deposit rate at 3.50% by mid-year. The question is what happens in Q3. Of course, it is data dependent and the swaps market strong leans toward a final hike by the end of Q3. The ECB's survey on lending released on Tuesday confirmed a tightening of credit standards. However, what was not said in most of the coverage of it is that it was desired by officials. The driver is the tightening of monetary policy. Net demand for loans fell sharply in Q1 and the share of rejected loan applications also rose.

The euro stopped about 4/100 of a cent from the 12-month high set last week near $1.1095. It traded down to almost $1.1035 in early European turnover, as the market awaits the ECB. A break above $1.11 targets the $1.1170 area initially and then $1.1275. Note that the upper Bollinger Band is found near $1.1095. There are options for almost 2.4 bln euros at $1.11 that expire tomorrow. Sterling made a marginal new high today since last June, slightly below $1.2595. It is holding a tight range, with the session low a little above $1.2550. A move above $1.26 targets the $1.2670 area and then $1.2760. The upper Bollinger Band is near $1.2580 today.

America

The market has at least initially judged that the Fed's preservation of optionality though claiming data dependency, means that the historically aggressive tightening cycle that began last March is over. It created space to pause without making a commitment. The futures market now has a 4.30% year-end effective Fed funds rate discounted. Chair Powell's comments were also seemed balanced, at least on the surface. He mentioned the rate hikes, balance sheet reduction, and now the bank stress was all pulling in the same direction of tightening lending conditions. Powell also said that demand continues to exceed supply and that the labor market remained very strong, with labor costs rising faster than what is thought to be consistent with the Fed's inflation target. However, the Chair's own bias is that the US does not enter a recession, and when he was trying to articulate the Fed's view, he put "close to” before "at", the peak. Powell also phrased it as a question of the "extent" to which further tightening is appropriate, but to signal a pause, "if" seems a better choice. He pushed back against concluding that monetary policy is sufficiently restrictive. Lastly, consider that in March, the median GDP forecast by Fed officials for 2023 was 0.4% year-over-year. The economy practically achieved this in Q1, alone. Doesn't that mean that the median forecast will likely probably be revised higher in June?

Leaving aside the JOLTS report for March and the softness in capex picked up by the durable and factory orders, excluding transportation and defense, a string of US economic data for April has been fairly robust. US PMI composite stands at 53.4, the highest since last May and the fourth consecutive improvement. April auto sales were well above expectations at 15.9 mln vehicles (seasonally adjusted annual rate, the strongest since May 2021 and about 10% higher than April 2022. Prices paid components of the ISM manufacturing and service surveys were strong (53.2 and 59.6, respectively). ADP reported a 296k increase in private sector payrolls, and although it has not proven very helpful in anticipating the national figures, it is the strongest under the new methodology. On tap today is the March trade deficit. Nearly anything today will be better than the record blowout in March 2022 of $106.4 bln. It could impact economists' expectations for Q1 GDP revisions but will likely have little market impact. The productivity and unit labor costs for Q1 will attract some attention, especially and unit labor costs appear to have surged in Q1, feeding into inflation worries. The weekly jobless claims are overshadowed by tomorrow's nonfarm payroll report. The median forecast in Bloomberg's survey calls for a 180k increase of which 156k are expected to be in the private sector. 

Canada reports the March merchandise trade balance. The positive terms-of-trade shock has worn off. In the first two months of the year, Canada's merchandise trade surplus was about C$1.6 bln. In the first two months of 2022, it recorded a merchandise trade balance of a little more than C$6 bln. The median forecast in Bloomberg's survey anticipates a C$200 mln surplus. Last March, it was C$2.16 bln. Canada reports its April employment figures tomorrow. Note that in the first quarter, Canada filled 171k full time positions, slightly more than it created in Q1 22 (~153k). Mexico reports April auto sales and March unemployment rate (seen at 2.68% vs. 2.72% in February). It also reports April consumer confidence. Still, the most important report ahead of the May 18 Banxico meeting is next week's April CPI. 

The US dollar is trading inside yesterday's range against the Canadian dollar (~CAD1.3580-CAD1.3640). It appears to be a bullish consolidation, but a break of the CAD1.3580 would negate it and signal a return toward the lows seen earlier this week near CAD1.3530. The intraday momentum indicators seem to favor an initial test on the lows in North America. The dollar slipped to new six-year lows against the Mexican peso yesterday near MXN17.8315. It began recovering yesterday and reached MXN18.0350 earlier today. However, is little changed in the European morning, hovering around MXN17.93. The 2017 low was near MXN17.45 with a multi-week shelf above around MXN17.55-60.

 

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