Eurozone flash PMIs to have eased in May

Market Movers

• In the euro area flash PMIs for May will be out. We expect both the manufacturing and service PMI to have eased slightly in May, thus underscoring that GDP growth should also ease a bit in Q2 albeit the recovery remains on track.

• EU leaders to start a two-day summit in Riga. While the official agenda is the cooperation with the EU’s Eastern partners, Greece is (again) expected to be discussed on the sidelines. According to some press reports the Greek prime minister Tsipras will present a debt restructuring proposal at the meeting.

• ECB to publish an official account of its 14-15 April meeting. As this was a relatively uneventful meeting, we do not expect any substantial new information. In light of Coeure’s recent comment on frontloading of ECB bond purchases focus will be on possible discussions about liquidity in the bond market.

• In the US existing home sales for April and flash Markit manufacturing PMI for May are due for release. Tuesday’s data on housing starts were very strong suggesting that the housing market is rebounding markedly on the back of the weather-related weakness in Q1. Note that Fed vice chair Fischer is scheduled to speak at 20:00 CET in connection with ECB's forum on central banking.

• No key data releases in Scandinavia today.

Selected Market News

Overnight the release of preliminary Chinese and Japanese PMIs provided a small boost to risk appetite as both rose in May. Although China’s PMI (HSBC) remained below the 50 boom/bust level, the details were strong with notably new orders-toinventory up. Overall, this suggests that the HSBC manufacturing PMI is now bottoming out. That said, there is still a considerable gap between the manufacturing PMIs and the hard industrial production data as the latter is substantially weaker than the surveys. We maintain that the Chinese economy will recover moderately in H2 supported by current monetary easing. Still, GDP growth will likely drop below 7% y/y in Q2 and we expect to see further monetary easing in the coming months as a result.

Separately, the minutes from the April FOMC meeting released last night revealed that while a June Fed hike now seems precluded, when and how to invoke on a normalisation of monetary policy is still very much up in the air. The FOMC thus had discussions about the extent to which Q1 weakness will prove transitory, how to communicate a first hike, what to expect in terms of market reaction to this, and the current level of the equilibrium of the real Fed funds rate. Crucially, the FOMC appears keen to avoid a sudden spike in rates. We continue to expect a first hike in September. Equities were slightly down in the US session while Treasury yields dropped a few bp in the short end and edged a little higher out on the curve. EUR/USD little changed on the minutes, still trading above the 1.11 mark.