Europe PMI Analysis

August 21st, 2014 7:49 am

Via TDSecurities:

UK & Europe

EURBoth the German manufacturing and services PMIs registered small falls, but these falls were much smaller than had been expected after last week’s sharp fall in the German ZEW data. The details of the German PMIs continue to be decent but were mixed. In the manufacturing PMI, new orders grew at the slowest pace in a year, but the services PMI reported new orders at their strongest level for three years. Employment growth continues but continues to see a softer pace, and German businesses are still adding to backlogs and the pipeline of work.

The French PMIs were mixed but largely weak in the details, however, they do seem to offer some of the first glimmers of hope. New business in services increased for the first time since March at the fastest pace since August 2011, and as in Germany, manufacturing new orders were at their weakest since early-2013. In contrast to Germany, there was a sharp drawdown of backlogs, especially in manufacturing, but with persistent weak demand and new orders, there is a worry that the backlogs will prove insufficient to sustain businesses and we’ll continue to see the job cuts quicken, as we are close to the fastest pace of jobs cuts currently. We continue to see signs here of very weak prices to try and compensate for the lack of demand as well. So we have some strength coming into service sector new orders, but it’s hard to expect that is sustained.

The pan-Eurozone PMIs both slightly missed consensus expectations and suggest some weakness in peripherals in August. Overall, today’s PMIs continue to suggest that global manufacturing is struggling but the core of German growth remains strong, and very unusually is being driven by services.

Hawk Speaks

August 21st, 2014 7:37 am


Index Extensions

August 21st, 2014 7:26 am

Via a fully paid up subscriber

US TSYS: Prelim Barclays extensions for Sep 1:
- US Tsys +0.12 yrs
- Agencies: +0.03 yrs
- Credit: +0.05 yrs
- Govt/Credit: +0.09 yrs
- MBS: +0.07 yrs
- Aggregate: +0.09 yrs
- Long Govt/Credit: +0.11 yrs
- Intermed Credit: +0.05 yrs
- Intermed Govt +0.09 yrs
- Intermed Gov/Credit +0.08 yrs
- US High Yield: +0.05 yrs
- US TIPS (Series-L) empirical extension at -0.06 yrs, and real extension at
-0.07 yrs
- US Government Inflation-Linked (Series-B) Index extension is estimated at
-0.06 yrs


August 21st, 2014 7:09 am

Via Marc Chandler at Brown Brothers Harriman:

- Some of the financial market trends that have been dormant for some time seem to be starting up again
- In the currency markets, many are getting excited about the possible continuation of the bullish dollar trend
- The FOMC minutes, the dissent in the BOE’s MPC and the recent data out of the EU and Japan reminds us the differences between major central banks
- PMIs for August were lower than expected for the Eurozone region as whole and in China, but higher in Japan

Price action: The dollar is broadly stronger on the day. The euro dipped below $1.3250 but has since recovered to 1.3270. UK retail sales data came in lower than expected at 2.6% y/y (exp. 3.1%), helping to pressure sterling lower at $1.6580. The dollar is notably stronger against the yen, at ¥103.84, a level not seen since early April. The main exception was the dollar’s decline against the Norwegian krone to 6.1520 following better than expected Q2 GDP numbers at 1.2% q/q (exp. 0.6%). EM currencies have followed majors lower against the dollar. LatAm currencies closed broadly lower yesterday, notably COP and BRL, while MXN and INR are underperforming this morning. The MSCI Asia Pacific index closed marginally lower but the Nikkei was up 0.8%, the ninth consecutive increase. EuroStoxx are up 0.4% and S&P futures are also up slightly.

  • Some of the financial market trends that have been dormant for some time seem to be starting up again.The S&P 500 index is 5 points below its highs. The Nikkei rose for the ninth consecutive session (though still negative ytd), in part supported by the weaker currency. After a 10% correction, the Dax is up 4% from its lows. The MSCI EM index is back to its 2012 high.
  • In the currency markets, many are getting excited about the possible continuation of the bullish dollar trend.The euro has fallen against the dollar for the last 4 sessions, making new lows for the year after falling nearly 5.5% since the May highs. Sterling has also followed suit, though less enthusiastically, down about 3.5% since the July highs. The yen has fallen in eight of the last nine sessions.At ¥103.77, the dollar broke out of the range and threatening the key ¥104.0, which was the high in early April. If that is breached, we are back to January levels.
  • Of course, relative moves in the fixed income space have been mostly consistent with these trends and the well understood policy differences between major central banks. For example, the spread between US and German 10-year yields started to widen again, now at 144 bp (in favor of the US). The spread had stalled around 120 bp between April and mid-June, but has now resumed its upward trend. The US-UK spread is back to flat after favoring the UK since early April, bottoming at -15 bp.
  • Indeed, markets seem to be once again falling under the familiar constellation of the US and UK on the hawkish side and the ECB and the BOJ on the dovish.  This perception was reinforced this week by the two dissenting votes from the BoE in favor of hikes and the recent string of soft data from the EU and Japan.
  • As the FOMC minutes suggest, the FED’s position has been changing gradually and mostly predictably. One could even say they have been the most clear of the major central banks. The minutes reinforce that the labor market is still the paramount variable determining the timing of tightening, in particular the participation rate – we will hear more about this tomorrow from Yellen in Jackson Hole. Of note, the minutes did bring a notable change. It stated that “most” officials now support re-investing the maturing securities until after the first rate hike, compared with “many” in the last minutes. Treasury yields ticked 3 bp higher after the minutes.
  • Eurozone’s PMIs for August were lower than expected. Services came in at 53.5, manufacturing at 50.8, while the composite was at 52. However, the German readings were better than expected, with the composite falling to 54.9, against expectations for a fall to 54.6. The Manufacturing component came in at 52.0 (exp. 51.5) and the services came in at 56.4 (exp. 55.5). France’s readings were mixed. The composite PMI was a bit better coming in right at 50, the highest level since April, and with new orders rising from 49 to 50.7. The services component surprised on the upside at 51.1 with manufacturing on the downside at 46.5.
  • China’s August PMI manufacturing numbers disappointed expectations at 50.3, a 3-month low, but remained in positive territory. The index was at 51.7 last month. Despite the disappointment, the figures do not challenge our view that the recovery remains in place. Separately, Chinese government officials suggested that more financial sector reports are in the pipeline.
  • Japan August Flash manufacturing PMI rose to 52.4 vs. expected at 51.5 and 50.5 in July. It still remains lower than March but the highest since April, just after the hike in sales tax. Japanse manufacturing business sentiment is showing some recovery even though private consumption remains weak. Japan’s July supermarket sales dropped 2.1% y/y, four straight months of decline, reportedly due to rising inflation and stagnant nominal wages.
  • Japanese weekly flow data shows local investors continue to increase purchase foreign assets. For the week ending on August 15, they purchased net ¥659.8 bln yen of long term non-Japanese bonds and the highest amount of short-term securities in 4-years, ¥159.9 bln. Also of note, foreign investors bought net ¥223.7 bln of long-term Japanese bonds, seven straight weeks of net purchases and the longest stretch since September 2008. But purchases of Japanese stocks remains subdued, at ¥87.7 bln, a weak rebound following a net sale of ¥585.2 bln yen in the last week.
  • Out of the US today, manufacturing PMI for August is expected to remain roughly unchanged at 55.7. Meanwhile, initial claims figures are expected to come down to 303K. Lastly, existing home sales are seen falling 0.4% on the month. This follows the release earlier in the week of the strongest print for housing starts in a year and a rebound in MBA mortgage approvals.

August 21 2014 Opening (Abbreviated)

August 21st, 2014 7:00 am

Prices of Treasury coupon securities have registered modest declines in overnight trading as the ripple effect of the hawkishly received minutes courses through the market. The yield on the 5 year note has climbed a basis point to 1.642 percent(comparison versus 500PM New York). The yield on the 10 year note has edged up to 2.442 from 2.429 and the yield on the Long Bond increased to 3.231 from 3.222. The belly has given ground versus the Long Bond. The 5s 30s spread narrowed to 158.9 from 159 and rests just above levels at which we closed on Friday. The 10s 30s spread has narrowed to 78.9 from 79.3 while 5s 10s steepened to 80 from 79.7. The 5 year note continued to languish as 2s 5s steepened to 117 from 115.6 and 2s 5s 10s widened to 37 from 35.9.

There is a wave of data today with info on initial claims and manufacturing in the Philadelphia region as well as leading indicators and existing home sales. I think we waffle around today within a very narrow range. MS Yellen tomorrow is the main event and so I think you do not see much more than position squaring ahead of that event tomorrow.

Overnight Flow

August 21st, 2014 6:31 am

Dealers report real money interest in the 10 year sector and central banks buying short coupons and bills and 2 year notes.

What to Watch Today

August 21st, 2014 6:26 am

What to Watch for today via the good folks at Bloomberg:
* (All times New York)
Economic Data
* 8:30am: Initial Jobless Claims, Aug. 16, est. 303k (prior
* Continuing Claims, Aug. 9, est. 2.520m (prior 2.544m)
* 9:45am: Markit U.S. Manufacturing PMI, Aug. preliminary,
est. 55.7 (prior 55.8)
* 9:45am: Bloomberg Consumer Comfort, Aug. 17 (prior 36.8)
* Bloomberg Economic Expectations, Aug. (prior 46)
* 10:00am: Philadelphia Fed Business Outlook, Aug., est. 19.5
(prior 23.9)
* 10:00am: Existing Home Sales, July, est. 5.02m (prior 5.04m)
* Existing Home Sales m/m, July, est. -0.5% (prior 2.6%)
* 10:00am: Index of Leading Economic Indicators, July, est.
0.6% (prior 0.3%)
Central Banks
* Kansas City Fed symposium at Jackson Hole, Wyo. (runs
through Aug. 23)
* 5:30am: U.K. to sell GBP3.25b 2.75% bonds
* 11:00am: Fed to purchase $2.05b-$2.50b notes in 2021-2024
* 11:00am: U.S. to announce plans for auction of 3M/6M bills,
2Y/5Y/7Y notes, 2Y FRN
* 1:00pm: U.S. to sell $16b 5Y TIPS in reopening

Record Wide

August 21st, 2014 5:58 am

I see 10 year US/Germany at a record wide of 143.7. One can also sell 10 year Spain and buy the still investment grade 10 year Treasury and pick 7 basis points.

A Yen to Sell

August 21st, 2014 5:53 am

The Japan Post group has been a large seller of yen recently as it flees the low yields in its home country for greater returns overseas. Here is a pertinent excerpt from a Japan newspaper:

   Indeed, Japan Post’s insurance unit has been boosting investments in foreign assets, as has its banking unit. The balance of Japan Post Bank’s foreign-currency-denominated assets — the bulk of which are bondholdings — rose 6.8 trillion yen ($65.39 billion) over a year to some 25 trillion yen as of the end of June. Japan Post Insurance’s holdings of foreign bonds and stocks, meanwhile, increased 700 billion yen to around 1.6 trillion yen.

“If domestic interest rates remain low, Japan Post Bank will continue to step up investment in foreign bonds,” said a Japan Post official. And Japan Post Insurance may invest an additional 300 billion yen or so in foreign bonds by the end of this fiscal year.

The market is also wary of another round of possible yen-selling. As early as September, the Government Pension Investment Fund will finalize its new asset allocation plan with a heavier weighting in risk assets. Other public funds are weighing similar steps.

As public pension funds rebalance their portfolios, Masahiro Nishikawa at Goldman Sachs Japan expects that their heavier investment in foreign securities could result in yen-selling pressure of 11 trillion yen or more.



UK Retail Sales

August 21st, 2014 5:35 am

Retail sales in the UK increased 2.6 from one year ago but the change from the previous month was a gain of just 0.1 percent. Analysts had predicted a month on month gain of 0.4 percent.

Analysts also noted that consumer spending on food declined for the first in twenty five years.