Forex Week in Review: May 1-6

It was a week many would like to forget. A week of surreal price movements across all asset classes. The perfect storm of price movement, with investors exiting the one directional, inflation premium commodity trade with gusto, after the CME cost hiking, the rumors of a Soros fund exiting ‘the’ trade and a less hawkish Trichet omitting the code words ‘most vigilant’ from his communique. Now the market has to endure European finance officials in Luxembourg for an unscheduled meeting as rumors of Greece possibly wanting to leave the Euro zone has market sentiment remaining on the defense at week’s end. Below are some of the highlights of the week:

EUROPE

• Euro area manufacturing PMI data for April was revised higher from 57.7 to 58.0, above expectations set for a flat 57.7 reading. The data is consistent with strong growth and provides a comforting outlook on the sector, especially in the light of the stagnant recent Ifo reading.
• Swiss SVME PMI indicator fell unexpectedly to 58.4 from 59.3 last month, while markets were looking for a 59.8 reading.
• Swedish PMI surprised to the upside in April, rising from 58.6 to 59.8 m/m with consensus set at 58.5.
• Unlike Norway who had a sharp downward PMI revision, as the headline fell to 55.6 from 57.4.
• UK manufacturing PMI badly disappointed with a drop to 54.6, the lowest level since last September. The market expected a 57.0 print and, to make matters worse, the March reading was revised down from 57.1 to 56.7. With a weak domestic orders component, does not bode well for growth momentum going into second quarter.
• In Sweden, the Riksbank’s minutes confirmed the very hawkish stand of the executive board.
• Portuguese/German 10-year spreads have tightened on news of agreement on an aid package between the Portuguese caretaker government and EU institutions. The deal still has to be approved by the Portuguese opposition and the EU governments.
• The Euro-zone services PMI was revised down slightly to 56.7 from the preliminary 56.9, coupled with the upward revision to manufacturing PMI, leaves the indicator on firm footing.
• UK construction PMI came in at 53.3, well below the 55.9 expected. Money supply data remained soft, the preferred measure of money supply for the MPC, the three-month annualized rate of M4 ex-intermediate OFCs eased to +1.0% from +1.7% in February.
• UK services dropped to 54.3 in April from 57.1 in March, well below the 56 consensus forecast. With all UK PMI surveys (manufacturing, construction and services) sharply lower this week points to sluggish growth entering the second quarter. This should keep the BoE dovish.
• German factory orders surprised the market with a sharp drop of -4% m/m in March with February print revised lower to +1.9% from +2.4% previously and pushed the annual growth rate to only +9.7% y/y, down from 19.6% in February.
• German industrial production beat expectations rising +0.7%, m/m vs. +0.5%.
• UK PPI printed higher than expected, with the output PPI rising +5.3%, y/y last month vs. +5.1% forecasted. Perhaps higher commodity prices might be starting to filter through.
• Both the BoE and the ECB held rates steady at +0.5% and +1.25% respectively. Trichet’s well documented less hawkish tone had the market pricing out near term inflation premium.
• In Norway, manufacturing production printed stronger than expected at +0.9%, m/m, vs. expected +0.6%. The annual rate accelerated to +3.0%, y/y from +2.0% in February.

Americas

• In Canada, Prime Minister Harpers Conservatives won a ‘majority’. To date, the Tories have pursued policies that have been fairly friendly to the CAD.
• US Treasury Secretary Geithner reiterated that global economies would benefit if China allowed its ‘substantially undervalued’ currency to strengthen. Expect more rhetoric to seek the appreciation of the Yuan ahead of the US-China Strategic Economic Dialogue next week.
• US manufacturing slowed last month (60.4), but not as much as expected (59.5). However, rising costs remain a problem (85.5). The ISM report contrasts the Fed’s regional surveys which show that manufacturing expanded in April. Manufactures continue to experience significant cost pressures from commodities.
• US factory orders climbed for a fifth consecutive month in March (+3%). A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain.
• US ADP’s estimate of +179k for private non-farm payroll growth fell short of market expectations (+200k). On the plus side, March data was revised higher by +6k to show a gain of +207k jobs.
• The much weaker than expected US ISM non-manufacturing data has given the investor another reason to be concerned about the US economy and further justifying the Fed’s ‘extended’ monetary policy. The ISM plunged 4.5 points to 52.8 in April, well below expectations (57.4).
• US weekly initial claims jumped to +474k, up from the previous weeks +431k. As long as the headline number stays above +400k, this would imply a slower recovery than the Fed would like.
• US Non-farm productivity rose at a +1.6% rate in the first quarter, beating the streets estimate of +1.1%. The preliminary estimate of hourly compensation (+2.7%) was half-a-percentage point higher, boosting the estimated growth rate of unit-labor costs to +1.0% versus a decline of 1.0% in the fourth quarter.
• Canadian Ivey PMI came out at 57.8, unadjusted 57.7, plummeting from 73.3 last month, has added some pressure to the ‘risk off’ tone mid-week.
• March’s Canadian building permits came in much stronger than expected, with a massive +17.2% increase after a strong +9.8% gain in February.
• NFP expanded by +244k last month, the biggest gain in a year, after a revised +221kincrease the prior month. The jobless rate climbed to +9% (first increase since November).
• Canadian employers added a net +58.3k jobs in April after a decrease of -1.5k in the previous month. The jobless rate unexpectedly dropped to +7.6%.

ASIA

• China’s April PMI fell -0.5 points to 52.9 with new orders falling -1.4 points to 53.8. Some proof that China’s economy is decelerating amid rising financial stress for non state owned companies, wide spread labor shortages, and emerging power interruptions. Does the weaker data curtail policy tightening?
• As expected, the RBA left their rate policy on hold (+4.75%). Their following communiqué was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation. Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. However, he went on to say that ‘the marked decline in underlying inflation from the peak in 2008 has now run its course.
• The Reserve Bank of India hiked policy rates +50bps to +7.25% and +6.25%, respectively on the repo and reverse-repo, more than the consensus forecast for +25bps.
• New Zealand building permits rose only +2.2% m/m in March after the sharp fall of -9.8% m/m in February.
• Japan Finance Minister Noda went out of his way this week to distinguish the current yen movement from the pre-intervention period. He noted that the moves stem from weakness in the dollar, not from yen strength.
• New Zealand reported a higher than expected +1.4% q/q rise in employment in the first quarter.
• Australian retail sales were weak in March, down -0.5% m/m vs. an expected +0.5% gain.
• The RBA’s Monetary Policy Statement also emphasized the possibility for further policy divergence. The statement came in more hawkish than market expectations of forecasts remaining unchanged. Policy makers indicated that market pricing of one hike over the year ahead (to May 2012) is not enough. Inflation is expected to be above its +2-3% target band by end 2013.

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