Price action in equity markets yesterday was largely characterized as consolidative, with the S&P giving back 0.19% as a weaker than expected Richmond Fed Manufacturing Survey kept markets from charging higher. Currency markets saw USD longs continue to unwind, led by strong gains in AUD and CAD that were supported by firming commodity prices, with a hot retail sales report out of Canada helping drive the Loonie higher against the big dollar.
A rather busy overnight session in terms of data releases has worked to shape risk appetite as we head into the North American open. Australian CPI data for Q2 was released overnight, with expectations that the region would see consumer prices move higher by 0.5% on a quarter-over-quarter basis. The evident weakness in the Australian economy has many speculating the RBA will look to ease rates further down the road, however one complication to contend with is the pressure the drop in the value of the Aussie with have on import prices, and whether or not that force will be strong enough to push inflation to an area where the RBA gets nervous around runaway prices. The read on consumer prices for the quarter was highly regarded as a make or break case for an interest rate cut from the RBA at their monetary policy meeting next month, however the official release of a 0.4% over the last quarter makes the issue less clear cut; so while the discussion surrounding monetary policy becomes more of a subjective one, it is clear the recent weakening of the Aussie hasn’t translated to runaway prices just yet. The softer than expected number weighed on the Aussie overnight, with the antipodean currency shedding almost a full cent and heading back into the low-92s.
Over in China, the Flash reading of the HSBC Manufacturing PMI survey hit the wires last night, looking to improve upon the 9-month low that was registered in June with a print of 48.2. The survey suggested that China may need to take additional measures should it want to follow through on the comments from its Premier earlier in the week about a minimum level of growth, as the reading came in at 47.7, an eleventh-month low. Output, new orders, employment, and backlogs of work all decreased at a faster rate in July, pointing towards a continuous slowdown in the manufacturing sector, that will surely raise speculation Beijing may look to add further stimulus should it wish to attain it “floor-level” 7% growth rate for 2013. The Loonie weakened slightly after the release, but managed to gain back these losses moving into the European session and the resurgence in PMI data from across the Atlantic.
Continuing with surveys of purchasing managers, Flash PMIs for the Eurozone in the month of July were also released. Analysts had been forecasting a moderately more positive month, and although the manufacturing sectors of Germany and France were still expected to contract from June, the rate of contraction had been expected to slow. Coming in with a healthy beat across the board, the better than expected prints have raised expectations that Europe might have been able to pull itself out of recession by the third quarter. German and French Manufacturing PMI data printed at 50.3 and 49.8 respectively, besting expectations of 49.2 and 48.8. The optimistic outlook from purchasing managers in the largest economies that make up the common-currency bloc helped push the Eurozone composite PMI output index to its highest level in 18-months with a print of 50.4. While headwinds such as record debt/GDP, bad loans at all-time highs, surging unemployment, and soft demand from China all posing potential problems the zone’s recovery will face, this is the first time the composite PMI survey has broken over the 50 level and signalled expansion since January 2012. Equities are surging midway through the European session, with the Stoxx, FTSE, and Dax well in the green as investors look to add risk to their portfolios. After being pressured during the Asian session, the EUR ramped against the USD after the PMI numbers, testing resistance in the mid-1.32s before giving back some of those gains and trading unchanged at the time of writing.
Turing our attention to the North American open, the buoyant mood is radiating through to equity futures, with the majors looking poised for a higher open once the bell rings. Hydrocarbons are finding themselves trading with a slight offered tone, as front month WTI trades below $107/barrel on what could be considered demand concerns from the weak numbers out of China. USDCAD is essentially unchanged from yesterday’s close unable to establish itself above the 1.0300 level, with the pair sneaking back beneath on the strong European PMI prints.
Later today we will get a read on New Home Sales in the US over the month of June. The annualized reading of new homes sold is forecast to come in at 482k, up from the 476k that was recorded in May. The incoming data on the housing industry has taken a bit of a breather in June, with affordability taking a hit as interest rates began rising near the end of May when the FOMC first started talking about tapering their QE program. The other possibility is that buyers may have tried to crowd the market in June in order to take advantage of the low rates before they got any higher, however the rest of the housing data for June has been soft and therefore would be a surprise to see New Home Sale come in with a large beat of expectations. The data is due out at 10:00am EST, and a material deviation from analyst forecasts are sure to ignite the “taper-on/taper-off” trade, and influence the direction of the USD and other high yielding currencies; make sure to speak with your dealing teams in order to strategize entry points in order to take advantage of any volatility experienced after the release.