Market News | Amana Capital
The JPY and the CHF are both well-established safe havens. From time to time other currencies can exhibit safe haven behaviours. In 2017, this was periodically true of the EUR. That said, this year’s return of concerns about Italy’s fiscal restraint is a reminder that the Eurozone’s crisis years are too recent to allow the single currency to adopt the mantle of a true safe haven, despite the region’s huge current account surplus, Rabobank reported.
Even though the UK runs a current account deficit, in past years GBP has satisfied a need for diversity when the EUR has been pressured by domestic factors. The political uncertainty connected with Brexit, however, has chased away any notion that the pound could fulfil the function of a safe haven.
A Dutch multinational banking and financial services company (Rabobank) said in its latest report that, in addition to fiscal and current account positions another feature of a safe haven currency is liquidity. Investors may stop chasing yield in times of crisis, but instead they demand easy access to their funds. This factor prevents currencies belonging to smaller economies with strong fundamentals from becoming safe havens.
"The US dollar has only a flirtatious claim as a store of value. Its huge liquidity, importance as a reserve currency and the role of Treasury paper as a safe haven asset means that the US dollar has strong safe haven links. However, the US’s budget and current account deficits significantly undermine any claim that the greenback is a true safe haven currency," Rabobank noted.
Japan's jobless rate likely ticked up to 2.6% in April, from 2.5% in March. It would take only a 0.4% month-on-month rise in April unemployment to push the jobless rate up, assuming trends in labour force increase are maintained. Job openings have been falling in the last three months, and that could dissuade would-be workers from joining the labour force. But we think the Shun to—the spring wage negotiations—delivered a positive result for workers.
More employees have been taken on with part-time contracts, rather than unattractive temporary contracts. Granted, the number of workers on fulltime contracts has been falling, but we reckon that people still out of the workforce by this stage in the cycle mainly would be interested in part-time work.
We still think that unemployment will resume its downtrend in coming months. The employment subindex of the manufacturing PMI tends to lead the jobs data by one-to-two months, and points to strong hiring into Q3, with the backlog of works remaining high. May data pointed to weakening next quarter, but for now, the labour market remains sturdy. Nevertheless, we see a strong possibility that unemployment rose in April. First, the number of unemployed people fell by a whopping 12.6% month-on- month in January.
It has risen since, but remains below the previous downtrend. Second, inventories have been the main contributor to domestic demand growth over the last three quarters. In part, that reflects supply-side bottlenecks, with the PMI imply that firms are unable to shift goods due to logistical problems. But we figure that weak private consumption growth has led to an unwanted inventory build. In short, we reckon now is not the time for a steeper unemployment downtrend.
The job-to-applicant ratio looks set to be unchanged in April, at 1.59. The uptrend in job postings has stalled recently. That was to be expected after the 69K leap month-on-month in December, compared with 15K on average in the previous 12 months. Firms then found it very difficult to fill these positions, initially turning to temporary workers, and then to part-time employees.
Job offers have risen robustly this year, though, and sentiment remains buoyant, including at small firms, according to the Tankan survey. We reckon job openings should begin rising again in April, but by less than the 20K-plus needed to push up the ratio, given our assumptions for job applicants.
The promise of higher wages and better contracts seems to have drawn people into the labour force. Not all of them seem to have found the jobs they want yet, however, with unemployment rising in the last two months after the January drop, accounted for by temporary workers. For this reason, we figure that the number of applicants will rise in April, albeit modestly.
Risk Aversion Dominates European Bourses; 10-Year BTP/Bund Spread Widens by 217 Bps
Risk aversion is dominating European markets; despite no Italian news on the incoming government, the 10-year BTP/Bund spread (now 212bps) has widened as far as 217bps, i.e. beyond its 2017 high of 213bps.
The 10-year Spanish/German has widened by a similar 19bps on the day (now 111bps) on the threat of a vote of confidence in PM Rajoy's government. EUR/USD has dropped to a 6-mnth low of 1.1650, EUR/CHF to a 2-1/2-month low of below 1.1550. The Italian and Spanish stock markets are down around 2%, while the Eurostoxx index is in the red only by 0.3%.
The United States’ April durable goods report revealed a -1.7% m/m reading, versus the revised 2.7% m/m reading that occurred in March (previous 2/6% m/m), below market expectations for a -1.3% m/m result. Durable goods ex-transportation came in 0.9% m/m in April, versus the revised +0.4% m/m reading that occurred in March (previous 0.1% m/m), above expectations for a 0.5% m/m result.
Meanwhile, durable goods ex-defense decreased -1.9% m/m, versus the 4.3% m/m decrease seen in March. Despite the decrease seen in the headline reading, underlying components were generally supportive.
Overall, upward pressure was seen from orders of non-defense capital goods, ex-aircraft (1.0% m/m, versus the -0.9% m/m reading seen in March), alongside similar upward pressure from core shipments (0.8% m/m, versus the -0.7% m/m reading seen in March).
Next week, in the United States key data releases include employment report, ISM manufacturing, PCE, and the second release of GDP. Also, the Bank of Canada (BoC) monetary policy meeting will be closely watched.
United States: Markets expect headline payrolls to come in at 170K for May. The unemployment rate fell sharply in April to 3.9% and economists expect it can maintain this low level in May. Average hourly earnings are likely to rise 0.2% m/m, leaving the y/y growth rate unchanged at 2.6%. Markets expect ISM manufacturing to rebound in May to 59.5. Economists expect core PCE inflation to rise by a small 0.2% m/m in April (0.15% unrounded), moving the YoY figure lower to 1.8% from 1.9% (although it is very close to rounding up to 1.9%). First quarter Q1 real GDP to be revised lower to 2.1% q/q annualized from its advance estimate of 2.3%.
Europe: In the euro area, markets expect headline inflation to jump to 1.7% y/y in May (vs 1.2% in April) and core inflation to rebound to 1.0% y/y (from 0.7%) as negative base effects related to the timing of Easter drop out. Economic confidence is likely to fall a touch to 112.5 in May. The unemployment rate should fall to 8.4%. M3 money supply should fall to 3.5% YoY in April. In Germany, economists expect HICP inflation to rise to 1.9% y/y in May from 1.4% in April and retail sales to grow 0.3% m/m in April. In France, markets expect HICP inflation to rise to 2.2% y/y in May from 1.8% in April. Final Q1 GDP should be confirmed at 0.3% q/q. In Italy, we expect HICP inflation to rise to 0.9% YoY in May from 0.6% in April. Manufacturing PMI should fall to 52.5 in May. Final Q1 GDP should be confirmed at 0.3% q/q. In Spain, markets expect HICP inflation to rise to 1.8% y/y in May from 1.1% in April and the manufacturing PMI to fall to 53.7 in May.
United Kingdom: Mortgage approvals should fall to 62.5K in April and we expect the manufacturing PMI to decrease to 53.5 in May. Markets expect Swedish Q1 GDP growth of 0.5% q/q. In Switzerland, economists expect Q1 GDP to grow 0.5% q/q. KOF should fall to 104.6 in May.
Japan: Economists expect IP to rise by 1.7% m/m in April, slightly above the METI’s forecast survey (+1.4%) due to a sharp rebound in real exports in April (+3.5% m/m). The unemployment rate should be flat at 2.5% in April. Nominal capex growth in the MoF survey should fall by 0.3% q/q in Q1 for all firms.
China: Markets expect the official manufacturing PMI to fall to 51.2 in May from 51.4 in April, below consensus expectations of staying flat.
Central Banks: We expect the central banks of Canada and Israel to keep their policy rates unchanged, in line with consensus expectations.
Note: On Monday markets in U.S. and UK will remain closed for Memorial Day and Spring Day, respectively.
Sweden's debt office announced that it will gradually take a position of as much as SEK7 billion for a stronger SEK vs the EUR in order to reduce borrowing costs, due to its assessment that the krona "is weak and expected to strengthen".
This signalling effect of currency undervaluation has seen the EUR/SEK drop promptly from about 10.26 to a 2-month low of 10.19. We'd also see the pair sustaining its break below 10.20 support and continuing down to 10.00-10.05 multi-day/week.