Central bank meetings in the frame but non-farm payrolls the major event of the week


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Q1 GDP revised up to -5.7% q/q from original -6.1% and -5.5% expected

  • US Q1 Personal Consumption out at +1.5% vs. +2.0% expected and +2.2% prior

  • US May Chicago PMI out at 34.9 vs. 42.0 expected and 40.1 prior

  • US May Michigan Confidence Index out at 68.7 vs. 68.0 expected and 67.9 prior

  • US may NAPM-Milwaukee out at 43.0 vs. 42.0 expected and 39.0 prior

  • UK Hometrack May Housing Survey out at flat m/m, -9.6% y/y vs. -0.3%, -10.1% prior resp.

  • AU May AiG Performance of Manufacturing out at 37.5 vs. 30.1 prior

  • AU may TD Securities Inflation out at -0.3% m/m, +1.5% y/y vs. flat, +2.1% prior resp.

  • AU Apr. Retail sales out at +0.3% m/m vs. +0.5% expected and +2.2% prior

  • AU Q1 Inventories out at -1.2% vs. -1.4% expected and revised -1.5% prior

  • China May PMI out at 53.1 vs. 53.5 prior

  • China CLSA May Manufacturing PMI out at 51.2 vs. 50.1 prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Manufacturing PMI (0755)

  • EU Manufacturing PMI (0800)

  • UK Manufacturing PMI (0830)

  • CA Industrial Product Price (1230)

  • CA GDP data (1230)

  • US Personal Income (1230)

  • US Personal Spending (1230 US PCE Deflator (1230)

  • US ISM Manufacturing (1400)

  • US Construction Spending (1400)

Market Comment:

We start a new month with the greenback hovering at its lowest level since mid-December on the USD index and the S&P index on Wall St having posted a 5.3% gain in the month of May having touched a 930.17 high during the month, close to its 2009 high of 943.85. Investors were encouraged that US growth revision continued to show a pull-up from the Q4 lows (at -5.7% q/q vs. 6.1% in Q4), even though the two quarter contraction of the US economy was the worst since the late 1950s.

Other US data saw a mixed bag. The Chicago Purchasing Managers Index came in below forecast at 34.9 vs. 42.0, and was a significant setback from the improvement seen in April. Order backlogs had their second-lowest reading since the recession began, and the employment index was at its lowest reading for this cycle. Most suggest that the proximity to Detroit, and the fallout in the US auto sector amid bankruptcy and restructuring of GM and Chrysler, is to blame for the poor reading. On the flip side, the NAPM reading for New York saw its biggest rise since February 2002 and the University of Michigan sentiment survey came in at an 8-month high of 68.7 versus 68.0 expected, with better future expectations offsetting a decline in the current conditions index.

Starting off the week, we saw the release of a handful of Australian data – retail sales in April were still below forecast, and down from the previous month as the impact of the fiscal payments to households had a reduced effect. Nevertheless, two consecutive months of positive data shows that the fiscal stimulus is having some effect and could be seen as a positive in the wake of the uncertain jobs situation. Q1 business indicators were weak, with company gross operating profits down by 7.2% q/q. Inventories were unwound further and fell by 1.2% q/q in the period but were marginally better than markets forecast. With Q1 GDP data scheduled for release on Wednesday, this weak performance looks set to confirm that Australia will officially slide into a technical recession, with market forecasts looking for a 0.2% quarter-on-quarter contraction following Q4’s -0.5%.

Prior to Wednesday’s data the RBA meets tomorrow, with the market mostly convinced that the Australian central bank will maintain its wait-and-see attitude on the economy and AUD interest rates. Since the downgrade to growth forecasts at the May meeting, RBA comments appear to have turned mildly bullish (or just less-bearish!). Naturally a great deal of Australia’s recovery is dependent on the nascent recovery in China continuing and strengthening. To this end, China PMI data today came in mixed with the official PMI for May showing a marginal slowdown to April, coming in at 53.1 versus 53.5. The private CLSA reading was more optimistic, coming in at 51.2 versus 50.1 prior. Still, both readings remained above the key 50 mark and would help preserve the risk appetite that was evident in the latter half of last week.

US Treasury Secretary Geithner embarked on his first official trip since confirmation and was quick to assure Chinese officials (and other overseas US investors?) the US intends to reduce its huge fiscal deficits (to around 3% of GDP) and promised “very disciplined” spending in the future. He urged China to shift its economic focus more to domestic demand rather than export-led growth and fully supported a bigger global role for China. His comment on the Yuan were certainly toned down from those uttered at his confirmation hearing, merely urging China to allow market forces to determine Yuan levels against other currencies.