Risk-on/risk-off sentiment stuck in a revolving door
• Will they? Won’t they? Markets were in turmoil on concerns that the Federal Reserve (Fed) might soon pull back its bond-buying programme on signs of a recovering US economy. In anticipation of higher interest rates, US Treasuries yields rose (prices fell) with the 10-year benchmark recording its highest yield (2.23%) in over a year. Data releases in the US when positive — such as consumer confidence at the highest level in five years; home values climbing the most in seven years — switched risk sentiment off, while a batch of negative data such as an unexpected rise in claims for unemployment, and a slightly sub-forecast reading of the Q1 gross domestic product growth (2.4% versus 2.5% earlier estimate), cheered the mood. Volatility was fiercest in the Tokyo market with the Nikkei 225 shedding 5.2% in just one day.
• In other developments, the Organisation for Economic Co-operation & Development (OECD) cut its global growth forecasts for 2013 from 3.4% to 3.1%, whilst forecasting a steeper contraction in the eurozone of 0.6% versus 0.1%. The International Monetary Fund (IMF) also cut its forecast for China’s growth rate in 2013 to 7.75% (previously 8%) mainly due to a weak world economy and exports. Over the weekend, Purchasing Managers’ Index (PMI) releases in China painted a confusing picture; while the official manufacturing PMI rose slightly to 50.8 in May (50.6 April), the HSBC PMI figure showed a decline in factory growth to the lowest level since September of 49.2 (50.4 April). A reading below 50 signals contraction. The disparity in the data once again raises concerns for the accuracy of Chinese economic data.
Shaping the markets – this week
Bated breath before the all-important US payroll number
• Data releases in the US will be in focus this week culminating with the all-important non-farm payroll employment report on Friday where markets expect a gain of 165k — a sharp deviation from which could reel the markets. Prior to that, the Institute for Supply Management (ISM) manufacturing data is released on Monday with consensus looking for a slight decline in May to 50.5 (confirmed at the time of writing: 49.0 versus 50.7 in April). Wednesday sees the release of the Fed’s Beige Book, providing a summary of current economic conditions. The unemployment rate, also released on Friday is expected to remain unchanged at 7.5% in May.
• In Europe, May’s PMI manufacturing reports are due on Monday with the first insight into the figures for Spain and Italy, which are expected to have continued to rise. The figure for the UK should also reveal further small gains due to signs of momentum in the sector (confirmed at the time of writing: 51.3 versus 50.3 expected). Revisions to the euro area Q1 gross domestic product growth and retail sales for April are expected on Wednesday. The latter is expected to continue the pattern since February, hence a slight decline of 0.2% (month-on-month) is forecast. Thursday sees the Bank of England’s governor, Sir Mervyn King, chair his last Monetary Policy Committee meeting before the arrival of Mark Carney. The European Central Bank is also meeting; neither bank is expected to announce a shift in policy. In Asia, the Japanese prime minister will be speaking on Wednesday, and is likely to shed further light on his structural reforms. In the early hours of Saturday, data releases in China are expected to show a slide in trade growth for May and a pick up in consumer price inflation.