A short squeeze in euro crosses was the most exciting facet of yesterday’s session, in which the majority of speculators will have once again settled to sit on their hands and wait for Thursday’s show. A short squeeze is simply traders testing to see just how committed are those investors who are looking to take an asset’s price lower. Yesterday’s seemed to suggest that our thoughts over the possibility of a disappointment and a euro positive move are valid although it was snuffed out in short order by euro bears. We would not be surprised if this is in anticipation of further hopes that today’s services PMIs from the Eurozone show similar negativity to Monday’s releases.
Once again, while the headline indices are important we will be watching the various price indices sharply for signs that core and periphery retailers and suppliers are having to cut margins in a bid to support output in the coming months, thereby increasing deflationary pressures. As on Monday, Italy’s figures are due at 08.45, France at 08.50, and Germany at 08.55 with the overall Eurozone average at 09.00 – all times BST. Expansion is expected to continue well in Italy, Germany and in the wider Eurozone while France’s numbers are expected to show contraction once again.
Poor price pressures were forecast for May, and we were correct in our expectation that the Eurozone-wide HICP inflation measure would print below the consensus of 0.6% – probably courtesy of that large German slash lower – coming in at 0.5%. Core CPI also hit a cyclical low of 0.7%, possibly pushing the argument that the falls in overall inflation are merely the transitory effects of weaker food and energy prices into the long grass.
Yesterday’s UK construction PMI continued to show a slowing of the record growth the industry has been through in the past 12 months. We noted last month that UK construction growth was slowing as renovation and restoration work needed following the winter floods in the South West of the country was coming to an end and that seems to have continued in May. The rate of commercial building output has increased at the slowest rate in seven months and, while home-building seems to remain the strongest area of construction, it too has fallen to the lowest level since February. In light of yesterday’s 11.1% increase in house prices in the past 12 months according to Nationwide, this number needs to be increasing and quickly.
That said, it does continue the recent UK growth story of strength into Q2 and sterling remained well supported on the day.
Yesterday’s factory-orders beat added to recent USD out-performance with USD/JPY moving to a 1-month high on the back of a move higher for US treasury yields. Monday’s decent manufacturing ISM reading, once finally correct, has continued hopes of a strong return of US industry with many hopes pinned on a Q2 that is typified by jobs market out-performance and inventory restocking. The reading is due at 3pm. The Fed is also due to release its Beige Book of regional surveys this evening; investors will be drilling down into that to see what appetite there may be for further reductions in stimulus and initial thoughts on recent US data strength.
The one G10 currency that the USD is not stronger against this morning as we open up in Europe is the Aussie dollar following the latter’s Q1 GDP numbers showed the fastest level of growth in 2 years. The Australian economy is finally starting to feel the effects of the Reserve Bank of Australia’s record-low monetary policy it seems. Exports increased by 4.8% in the quarter, a tremendous number but one which came during a time when the AUD/USD rate was on average 0.8963, a full 3.4% lower than where it sits now. The average for Q2 so far is 0.9307. Pressures from Government Treasurer Joe Hockey’s latest budget, and the swingeing cuts therein, are an obvious headwind to future expansion. Even so, as it stands at the moment that the Australian economy is doing a lot better than a fair few people, ourselves included, thought possible at this point in time.
