Danskebank Market movers today
- In the US, we have two important data releases. Based on the higher-than-expected CPI data in January, we estimate PCE core rose 0.3% m/m (close call between 0.3% and 0.4% in the case of CPI, so do not be surprised by a 0.4% print here). We think this would be enough
to lift the PCE core inflation rate to 1.6% (consensus 1.5%). ISM manufacturing is also due out today and we estimate the index to have been broadly unchanged around the current level of 59.1. We have seen mixed signals from Markit PMI and regional PMIs.
- The Fed’s Jerome Powell is due to testify before the Senate Banking Committee but we do not expect him to say anything new. In our view, Powell was slightly hawkish on Tuesday, see Flash Comment US: Powell says ‘personal outlook has strengthened’.
- In the UK, we estimate the PMI manufacturing index stayed around 55.3 in February. Also, keep an eye on any new Brexit comments and possible leaks from PM Theresa May’s speech tomorrow (usually leaked late afternoon).
- In the Scandies, PMI manufacturing is due in both Norway and Sweden.
Selected market news:
- Risk sentiment soured yesterday asinvestors worry about faster Fed rate hikes and some signs that the global cycle is weakening. The losses in the stock market should also be seen in the light of the recent market recovery, which may have been used by investors to take some risk off the table. Bond yields retreated again yesterday, adding to signs that the big bond market sell-off seen in the first two months of the year is over for now. US data also surprised on the downside again as Chicago PMI fell to 65.7 in February from 61.9 and pending home sales dropped 4.7% m/m in January. Bonds also got some tailwind from a slide in oil pricesfollowing data, which showed a rise in US oil inventories.
- In China, the private version of manufacturing PMI from Caixin surprised on the upside rising to 51.6 in February (consensus 51.3) from 51.5 in January. It is in sharp contrast to the official PMI manufacturing from NBS released yesterday, which surprised strongly on the downside. Which one is right? We belief the true picture is somewhere in the middle. That China is slowing but only moderately – as also signalled by the development in global metal prices where the upward pace has eased somewhat but not pointed to a sharp slowdown in demand.
- US President Donald Trump warned China again yesterday on the trade front, saying that the US will use “all available tools” to protect the US from China’s state-driven economic model,
which he says undermines global competition, see Bloomberg. The warning came in the President’s annual report to Congress on his trade-policy agenda.
- FX markets
EUR/USD remained under pressure yesterday as markets digested Powell’s hawkish tone in the House hearing, and while there is a risk this move could be sustained today around the Senate hearing, we maintain that for EUR/USD the 2017 high of 1.2092 should provide good support. Indeed, if the cross is moving close to 1.21 it would in our view be a buying opportunity: the risk of US inflation outperformance favours a weaker USD still as long as Powell makes no revolutions at the Fed. We remain long the cross via options as one of our FX Top Trades 2018.
- EUR/GBP bounced yesterday on the back of EU’s Chief Brexit negotiator Michel Barnier’s briefing on Brexit, where he presented a relatively hard stance on Brexit by for example stressing that a transition agreement is not a given. While the EU’s hard stance on Brexit is clearly GBP
negative as it illustrates that Brexit negotiations are likely to be complicated and could drag out, it is important to remember that this is part of the political ‘game’ where both sides (EU and UK) are preparing/positioning for negotiations. Hence, it is fully expected that the divergence
between the UK’s and EU’s stance on Brexit is high now as negotiations are about to start, and we are going to hear a lot of noise from now until the EU summit on 22 -23 March. Focus now turns to PM Theresa May’s speech on Friday. We expect EUR/GBP to remain volatile within
the 0.8770-0.8925 range in the short term. We still look for EUR/GBP to move significantly lower longer term when we have more clarification about Brexit. We target 0.84 in 12M.