• US ISM drops by most against expectations since Lehman

  • Australian central bank holds rates, goes AUD neutral

  • We suspect this will be a blip, driven by the polar vortex weather

  • UK construction PMI at 09.30, Italian CPI at 10.00

Global financial weakness has continued overnight as the market struggled to digest poor data from the world's economic superpowers. I told yesterday of the weakness in Chinese growth shown from slips in the country's manufacturing and services PMIs. Later it was the turn of the US to take on the crown of disappointment.

January has been a month of horrible weather for most of the United States and we believe a lot of yesterday's hideous ISM reading from the manufacturing sector was specifically as a result of this. The ISM reading fell to 51.3 vs an estimated 56.0; the largest drop against estimates since the Lehman crisis, although in that case the overall index fell into contraction; we have remained broadly expansionary so far. Given the area in which the ISM fell - the biggest decline in new orders in 14 years the main culprit - we can reasonably expect a strong recovery next month. The market was not prepared to wait on next month however and gave the USD a strong smack.

The correlation between GDP and ISMs are a lot stronger than any relationship between GDP and payrolls data, due Friday. A move lower in Wednesday's services reading will have analysts taking the axe to their payrolls estimates and increasing chatter that the Fed may have to start tapering the rate of its tapering i.e. slowing the rate of stimulus withdrawal. This would be the 3rd derivative of US monetary policy.

The US's number was not the only disappointment. The UK figure sent the pound lower over the morning as it missed consensus for the 2nd month in row. The number of 56.7 against 57.3 expected shows growth remains well in expansionary territory however. Growth in export orders was the strongest since February 2011 and, thankfully, shows that British exports are being demanded across the world as opposed to just in Europe. Jobs have moved higher as well with the pace of job creation close to a 2.5 year high. These are all encouraging numbers, but they will need to be sustained long through this year and next so that any meaningful rebalancing of the UK economy away from services can accurately be seen.

Eurozone PMIs have been greeted positively in the European session with particular good news coming from the periphery. The overall measure rose to a 32 month high but Greece posted its first reading over 50.0 in 53 months with gains seen in overall output and new orders. Spain’s manufacturing number hit a 41 month high as the jobs market showed a strong turnaround. France’s number improved but remained in contractionary territory.

Overnight the RBA has met the market's estimates on monetary policy by holding rates at the current record low of 2.50%. The attached statement left out any mention of an overly strong AUD for the first time in a few meetings, signalling a central bank becoming a lot more policy neutral. The statement also suggested a greater confidence in consumer demand and housing construction. AUD is over a per cent higher this morning while the JPY has remained the darling of those eager to bet on further declines in risk assets.

The story for today's markets will be a rather strange one; how bad does the US slip need to be for it to be beneficial to the emerging markets? A prolonged, deep slip in the US recovery would have traders betting on an increased stimulus hit from the Federal Reserve and there are 2 things that have been driven higher by the use of quantitative easing - global equities and emerging market currencies.

Today's data calendar is the quietest of the week but volatility can still be found with UK construction PMI at 09.30 and Italian inflation at 10.00.

Disclaimer: The comments put forward by World First are only our views and should not be construed as advice. You should act using your own information and judgment. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgment as of the date of the briefing and are subject to change without notice. Any rates given are “interbank” ie for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD consolidates weekly gains above 1.1150

EUR/USD consolidates weekly gains above 1.1150

EUR/USD moves up and down in a narrow channel slightly above 1.1150 on Friday. In the absence of high-tier macroeconomic data releases, comments from central bank officials and the risk mood could drive the pair's action heading into the weekend.

EUR/USD News
GBP/USD stabilizes near 1.3300, looks to post strong weekly gains

GBP/USD stabilizes near 1.3300, looks to post strong weekly gains

GBP/USD trades modestly higher on the day near 1.3300, supported by the upbeat UK Retail Sales data for August. The pair remains on track to end the week, which featured Fed and BoE policy decisions, with strong gains. 

GBP/USD News
Gold extends rally to new record-high above $2,610

Gold extends rally to new record-high above $2,610

Gold (XAU/USD) preserves its bullish momentum and trades at a new all-time high above $2,610 on Friday. Heightened expectations that global central banks will follow the Fed in easing policy and slashing rates lift XAU/USD.

Gold News
Week ahead – SNB to cut again, RBA to stand pat, PCE inflation also on tap

Week ahead – SNB to cut again, RBA to stand pat, PCE inflation also on tap

SNB is expected to ease for third time; might cut by 50bps. RBA to hold rates but could turn less hawkish as CPI falls. After inaugural Fed cut, attention turns to PCE inflation.

Read more
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures