European Data Stabilizes – Will US Do the Same?

Market Drivers March 05, 2019
EZ data stabilizes
UK PMI Services beats
Nikkei-0.44% Dax 0.17%
Oil $56/bbl
Gold $1284oz.

Europe and Asia:
AUD AU RBA on hold
EUR EX PMI Composite 52.8 vs.52.3
GBP UK PMI Services 51.3 vs. 49.9

North America:
USD ISM Non-Manufcatuing 10:00
USD New Homes Sales 10:00

After a weak Asian open in risk driven by a disappointing miss in Chinese PMI Services numbers, high beta currencies stabilized in European dealing as economic news from the region improved slightly.

The Caixin PMI came in at 51.5 vs. 53.5 inching ever closer to the 50 boom/bust level. New business demand dropped as did the employment gauge suggesting that economic conditions in the services continue to deteriorate. Both Aussie and kiwi tumbled to session lows in response, but the follow through was limited.

In early European dealing the final print of EZ Composite showed an ever so slight improvement to forecast coming in 51.9 vs. 51.4. The news indicates that economic demand in the EZ may have stabilized which could alleviate some pressure on Mario Draghi, but the EURUSD remained near the lows of the day as the consensus view is that ECB will have to assume a more accommodative stance and delay normalization for the foreseeable future given the perilous conditions on the ground.

In UK the PMI Services print managed to remain in expansionary territory coming in at 51.3 versus 49.9 eyed. According to Markit, “UK service providers signaled that the subdued start to the year continued into February, with business activity expanding only marginally and incoming new work falling for the second month in a row. Moreover, employment numbers declined at the fastest pace for over seven years as businesses opted to delay staff hiring in response to subdued demand and concerns about the near-term economic outlook. The main positive development in February was a slowdown in input cost inflation to its weakest since May 2018, which helped to provide some scope for promotional discounting.”

UK demand clearly remains fragile as business activity is essentially frozen by Brexit uncertainty and although cable managed to pop to 1.3192 in reaction to the beat, the follow through has been limited. All focus with the pound remains on next week’s Brexit vote in Parliament and while the general view is that some sort of delay or compromise will be reached, there is still plenty of opportunity for more turbulence in the pair.

In North America today the key focus will be the ISM Non-Manufacturing report which tends to be one of the better forecasters of the NFPs as well as key gauge of US overall demand. After a wobbly Q4, the market will be keen to see a rebound in activity as political and trade tensions have died down and any firm print is likely to push USDJPY through the 112.00 figure as the day proceeds. However, if the data misses much as the ISM manufacturing did, it could unleash a big unwind in risk assets and drag the pair back to 110.00 on fears that US growth is slowing markedly.