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Summary

  • Japan's business are more pessimistic than the headline Tankan suggests.
  • Eurozone PMI in line with flash.
  • UK disappointed.

The US dollar is mixed against the major currencies as Japan's Tankan and European PMIs leave participants waiting for stronger cues. Against the euro, yen, sterling and Canadian dollar, the greenback has been confined to yesterday's ranges. Many of the high-beta emerging market currencies, like the Turkish lira and South African rand, are giving back some of their recent gains.

There are five developments that stand out. First, Japan's Tankan survey generally showed improvement, but slightly less than the consensus expected. For example, the much-followed sentiment among large manufacturers improved to 17 from 16, and is the highest since 2007, but fell shy of the 19 of the consensus forecast.

Evident in the details was a degree of pessimism, and this is really the takeaway. Capex among the large companies is expected to increase 0.1% in the fiscal year that begins today. The last Tankan survey in December showed a 4.6% increase. Profits were expected to fall 2.3% this year, after a 28% rise last year. Projections for the June survey were lower than expected.

Moreover, the Japanese economy unexpectedly lost momentum in February. As we learned yesterday, industrial output fell 2.3% in February. The market had expected a 0.3% increase. We learned last week that the overall household spending fell 2.5% (year-over-year) in February. The market had expected a 0.1% increase after 1.1% in January.

The controversial retail sales tax increase (from 5% to 8%) goes into effect today. The economy was losing momentum prior to it, and this is of some concern to the Japanese government. Finance Minister Aso said last week that the government will expedite this year's spending. Although the decision is unlikely before late in the year, the next leg of the retail sales tax (to 10%) may very well be deferred.

Second, the Chinese yuan strengthened the most in a week today (0.18%). It was aided by the official manufacturing PMI, which ticked up to 50.3 in March from 50.2 in February and slightly above expectations. In contrast, the flash HSBC measure was revised from 48.1 to 48.0 in the final read. A Bloomberg report citing a US investment bank and the Depository Trust and Clearing Corp. estimate that clients of US commercial banks have lost around $2 bln in Q1 on $332 bln of derivatives (options) on expectations of yuan strength. Chinese companies, the report says, have lost $3.5 bln on $150 bln (forward contracts).

Third, the Reserve Bank of Australia left rates on hold, with the cash rate at a record low 2.5%. The accompanying statement continued to indicate a period of stable rates. Regarding the currency, its verbosity was minimal, recognizing that it remains high by historical standards and that its recent strength offsets some of the improvements that had been seen. The Australian dollar briefly pushed through $0.9300 to a new four-month high. This appeared to have brought in some profit-taking, and the Aussie returned to its lows near $0.9255.

Fourth, the euro area manufacturing PMI was unchanged from the 53.0 flash reading, which was down slightly from the 53.2 reading in February, and it's the second consecutive monthly decline. The index remains above the 50-level, but without much momentum. The euro economy has improved from contraction to a little better than stagnation. The weak growth generally offsets the decline in interest rates to prevent improvement in the debt/GDP ratios.

Of note, Germany was revised slightly lower from the 53.8 flash reading (to 53.7), while France was revised higher to 52.1 (from 51.9 flash and 49.7 in February). It is too little too late to save Ayrault's job. Following the Socialists' loss in the local elections, Hollande named Interior Minister Valls as the new Prime Minister. Elsewhere, Spain and Italy bested expectations. However, Italy, like France last week, reported an increase in unemployment to new record highs (Italy 13% in February from 12.9% in January).

Fifth, the UK PMI was disappointing. It fell to 55.3, the lowest since July, and the February series was revised to 56.2 from 56.9. After last week's reported Q4 current account deficit blowout (GBP22.4 bln vs. GBP14.0 bln expected, and a revised GBP22.8 bln deficit in Q3 from GBP20.7 bln) led to an understandable focus on the export component of the PMI. It fell to 52.8 from 53.4, the lowest since last May. News that the employment sub-index rose to a new 33-month high was largely ignored.

The North American session features the US manufacturing ISM. It is expected to increase to 54.0 from 53.2, and prices paid are expected to slip from the 60 reading in February. Meanwhile, February construction spending is expected to be flat, and may still be, at least in part, impacted by the weather. March auto sales are expected to have picked up to a 15.8 mln unit pace, which represents a 4-month high and should help underpin retail sales. Lastly, we note that Yellen's comments yesterday helped ease short-term US rates.

Source: Mixed Data Leaves Dollar Of Two Minds