Eurozone growth laughs in the face of pessimistic surveys
May 1, 2019
Sterling topped the G10 currency board yesterday despite no breaking economic or political news. This adds credibility to the idea sterling profited from end-of-month flows, which has frequently been the case at the end of April in recent years. With the pound recently trading at historic lows against the US dollar it is perfectly poised to pounce on broad greenback weakness, and yesterday it did. The upside is limited for the pound, however, due to Brexit uncertainty and a deteriorating economic picture. This morning will see the UK data calendar begin for the week with April’s Manufacturing Purchasing Manager Index releases at 09:30 BST. In March, the manufacturing index was overly inflated by Brexit stockpiling. It will likely take a few months before the PMI rebalances from high inventory levels, so the headline figure must be taken with a pinch of salt.
The single currency had a stellar day yesterday after both Q1 Flash Gross Domestic Product growth and German Inflation figures left expectations behind them in the dust. Inadvertently, the 0.4% Q1 GDP increase raised some sensitive questions about the reliability of economic surveys like the PMI, as these surveys remained near the same low levels as in Q4 last year. As Q4 growth remained stuck at 0.2% last year, a similar soft GDP reading was expected based on this, which turned out not to be the case. The Easter effect meanwhile had a whopping impact on the German inflation reading, with the Flash April Consumer Price Index coming in a full 0.5% higher than expected at 2.1% year on year. As German Unemployment was reported yesterday to have fallen to the lowest rate since the German unification at 3.2%, risks to German inflation due to wage pressures appear to be to the upside. A view held by some is that the European Central Bank remains quite sensitive to German policy preferences and political pressure, which would imply tighter monetary policies if German inflation accelerates. This would be the case, even if inflation across the rest of the bloc keeps being moderate. Today is a bank holiday in most European countries due to Labour Day, which will likely keep trading volumes suppressed.
The US dollar weakened across the board yesterday after Chinese manufacturing data surprised to the downside and the Eurozone economy posted positive Q1 GDP readings. One would normally expect poor Chinese data to spark a risk-off rally, which would, in turn, benefit the US dollar if recent times are anything to go by. However, with the Chinese authority’s commitment to higher growth proving resilient, yesterday’s data suggested further growth positive policies may be forthcoming. Combined with an easing Eurozone environment, riskier currencies began to take some profits against the dollar. Tonight, the FOMC will release their latest monetary policy decision, with a unanimous expectation that rates will remain on hold for the foreseeable future. Topics of focus will be how the Fed interprets last week’s huge Q1 GDP release, falling inflation levels, and liquidity pressures in the banking system. A technical adjustment in overnight lending rates could prove net dovish by the Fed, but the jury is out on whether they will make the adjustment in tonight’s meeting.
The loonie clawed back early losses in yesterday’s session after Saudi Energy Minister Al Falih stated the largest OPEC member will stick to the global oil deal pact with markets being “well supplied”. This means little in reality, however, with Saudi Arabia still 500,000 barrels per day below their current quota limit, but the minister’s comments proved enough to prompt a burst in crude strength. In the afternoon, February’s GDP data was released and pointed to a 0.1% decrease in economic output from January. Despite the negative surprise, the release was ineffective in causing loonie weakness as it fitted the recent theme of poor Q1 growth previously highlighted by the BoC and Q1 Business Outlook Survey.