Markets: Brackets

March madness for markets continues. The analogy to US college basketball shouldn’t be ignored, its Friday and more surprises will follow. Brackets force impossible choices and generate random outcomes that even the best systematic algos find difficult to win whether in hoops or currencies. Upsets happen. The hope going into today was the ECB/FOMC and other central bank dovishness would be the push for a rebounding growth story into 2Q. But as we see how the flash PMI reports have gone in Asia and Europe, this will be difficult. Throw the lower CPI in Japan despite higher energy costs and you get the picture of doubt. Central bankers may be pushing on a string. The problems of Brexit, US/China trade and in politics almost everywhere (Thailand, India, Spain, South Africa) all block a simple trend higher in risk and any rebound in confidence. Brexit headlines dominate EU trading still. At a pivotal European Commission summit where meetings overran dramatically, the EU offered the UK a two-pronged plan to extend Brexit beyond the March 29 deadline. The UK will be offered a delay until May 22, if MPs approve the deal Prime Minister Theresa May had negotiated. If not, the EU will support a shorter delay, to April 12 to formulate a new plan. Delays are better than a hard Brexit April 1 but clearly not enough to hold GBP bid if global growth sags. The US/China trade talks drag on with US Treasurer Mnuchin and USTR Lighthizer in China Mar 28-29 and Vice Premier Lui back in the US in early April. The arguments for a coordinated recovery leave it back to the US and the rebound seen yesterday in weekly jobless claims and the Philadelphia Fed manufacturing index – adds to views of divergence. This puts the US home sales and flash PMI reports in the spotlight today. In the land of the blind, the one-eyed man is king arguments follow for currencies as the USD seed no alternatives. With German Bund 10-year yields near negative and German Manufacturing PMI at 6 ½ year lows, growth and rate differentials are sufficient to support the buck. 

Question for the Day: Are markets too positive on US growth? US divergence is the theme of the day and it starts with 2Q expectations. The supporting factor is the FOMC shift from January and the Wednesday meeting making it clear that rates aren’t going to move anytime soon. The burden of proof for another series of hikes rests on better growth and higher inflation and not just one or two months of such. Global factors are back in play, as they were for Yellen back in 2015. 

There are, of course, reasons to fear the contagion of doubt from abroad starting with China and extending to Europe. The German PMI flash today is weak enough to put all eyes back to China PMI reports for March next. There isn’t a lot of faith in central bankers actions being sufficient to reverse the Financial Conditions tightening from 2018 fast enough. We are watching a stall speed risk abroad and fear an outside shock could crash the global economy – whether that is political events, natural disasters or more expected like Brexit or China trade talks failing. 

What Happened?

• Australia March flash CBA composite PMI 50 from 49.1 – better than 48.3 expected. The services PMI continued to soften but at a slower pace 49.8 from 48.7 – also better than the 48.5 expected. The manufacturing PMI grew but at a slower rate 52 from 52.9 – weaker than the 52.3 expected. Softer growth in 4Q continues in 1Q across sectors. New orders are slowing back to 50, employment slowing as well.

• Japan March flash manufacturing PMI unchanged at 48.9– weaker than 49.2 expected. The report showed further production cutbacks – worst in 3 years - and weaker new order inflows from both domestic and foregin. Business confidence is still below the long-run average with focus on China growth and trade frictions. 
• Japan February CPI 0% m/m, 0.2% y/y unchanged 0.2% y/y – weaker than 0.3% expected. The core CPI slows to 0.7% y/y from 0.8% y/y – also weaker than 0.8% expected – while the core-core CPI held 0.4% y/y – more than the 0.3% expected. Gasoline prices fell 1.3% y/y after a 0.8% gain in January – the first annual decline since Nov 2016.

• Eurozone March flash composite PMI 51.3 from 51.9 – weaker than 52 expected – 2-month lows. The manufacturing  PMI fell to 47.6 from 49.3 – worse than the 49.5 expected and 71-month lows with output at 47.7from 49.4. The services PMI slows to 52.7 from 52.8 – as expected and back to 2-month lows. Weak order books and lower confidence drive to reduced employment across the Eurozone. The IHS Markit research sees GDP implied for 1Q running at 0.2% with manufacturing down 0.5% offset marginally from service sector growth of 0.3%.  
  • France flash composite PMI 48.7 from 50.4 – weaker than 50.7 expected – 2-month lows. The manufacturing 49.8 from 51.5 – also weaker than 51.5 expected, while the services slip to 48.7 from 50.2 – weaker than 50.8 expected. The drop in new orders was notable with exports at 3-year lows. Employment continues to increase but softest rate since Dec 2016. 
  • German flash composite PMI 51.5 from 52.8 – weaker than 52.7 expected – 69-month lows. The manufacturing 44.7 from 47.6 – weaker than 48.1 expected – 79-month lows with output similarly weak at 45 from 47.9. The services fell to 54.9 from 55.3 – slightly better than 54.8 expected. Jobs fell in manufacturing and with services ease to the lowest growth since May 2016. 

Market Recap:

Equities: The US S&P 500 futures off 0.4% after a 1.09% gain yesterday. The Stoxx Europe 600 is off 0.5% after opening higher reversing on growth concerns post PMI flash reports. 

• Japan Nikkei up 0.09% to 21,627.34
• Korea Kospi up 0.09% to 2,186.95
• Hong Kong Hang Seng up 0.14% to 29,113.36
• China Shanghai Composite up 0.09% to 3,104.15
• Australia ASX up 0.44% to 6,280.90 
• India NSE50 off 0.54% to 11,458.45
• UK FTSE so far off 0.75% to 7,300.38
• German DAX so far off 0.5% to 11,493.88
• French CAC40 so far off 0.85% to 5,333.27
• Italian FTSE so far off 1% to 21,162

Fixed Income: Weaker data and dovish central bankers add to the technical moves in EU bonds today – German 10-year bond yields off 4bps to 0.01%, Franc of 4bps to 0.37%, UK Gilts off 3bps to 1.05% while the periphery is mixed with Italy up 2bps to 2.45%, Spain off 2bps to 1.09%, Portugal off 1bps to 1.27% and Greece up 3bps to 3.77%

• US Bonds flip bid with equities turning, curve still kinked– 2Y off 2bps to 2.38%, 5Y off 4pbs to 2.29%, 10Y off 3bps to 2.49%, 30Y off 5bps to 2.98%. 
• Japan JGBs see curve flatter despite BOJ, with CPI and equities driving– 2Y flat at -0.16%, 5Y flat at -0.16%, 10Y up 1bps to -0.04% while 30Y off 5bps to 0.53%. 
• Australian bonds continue to rally– 3Y off 2bps to 1.47% - further below RBA cash rate – 10Y off 9bps to 1.80%. 
• China PBOC skips operations for 3rdday– bonds rally but curve flatter – 2Y up 2bps to 2.79%, 5Y flat at 3.04%, 10Y off 1bps to 3.14%. 

Foreign Exchange: The US dollar index flipped in Europe, from -0.2% in Asia, now up 0.15% to 96.65. The dollar is bid in EM as well with Asia: INR off 0.2% to 68.93, KRW off 0.55% to 1133.40; EMEA: RUB off 0.6% to 64.238 and ZAR off 1.1% to 14.364 and TRY off 1.6% to 5.548

• EUR: 1.1305 off 0.6%. Range 1.1288-1.1391 with the reversal on PMI flash and 1.1250 back in play as 1.1420-50 holds
• JPY: 110.50 off 0.3%. Range with 110.46-110.90 with EUR/JPY 124.90 off 0.9%. Risk mood turning with 110 pivotal support. 
• GBP: 1.3120 up 0.15%. Range 1.3081-1.3158 with EUR/GBP .8615 off 0.65% - Brexit and weaker EU PMI driving 1.30 remains pivot 1.3350 key.
• AUD: .7095 off 0.2% Range .7088-.7119 with NZD .6870 off 0.1%. Back to tracking rates and growth stories as crosses drive .7050 key pivot. 
• CAD: 1.3380 up 0.15%. Range 1.3352-1.3385 with focus on CPI/Retail Sales today – 1.3250-1.3450 in play. 
• CHF: .9960 up 0.4%. Range .9912-.9970 with EUR/CHF 1.1265 off 0.15. EUR driving. 
• CNY: 6.7090 up 0.2%. Range 6.6950-6.7150 with PBOC fixing 6.6944 after 6.6580 yesterday. 

Commodities: Oil down, Gold up, Copper off 0.15% to $2.9265.

• Oil: $59.53 off 0.75%.Range $59.41-$60.07 with Brent off 0.7% to $67.39 with $67.98 highs – technical selling at $60 WTI and $68 Brent still matters. Focus now on global growth with weaker PMI flash hurting.
• Gold: $1313 up 0.45%.Range $1306.50-$1313.60 with focus on equities, FX again - $1305-$1320 keys. Silver up 0.55% to $15.52 with $15.50 tender base. Platinum $858.70 off 0.3% while Palladium $1551.90 off 0.4%. 

Conclusions: Does the shift in global rates help ease US deficit concerns? The FOMC said it was pausing from its push higher in rates back in January and confirmed that path more clearly this week. The effect on US rates was significant but the real move is on global rates. The negative yielding debt globally is back on the rise and this matters to the USD, to the US debt markets and to the way emerging markets see capital flows. Negative 10-year rates in Japan and approaching in Europe matter. The risk for a negative feedback loop abroad is growing for the US. The USD is the barometer and shock absorber for larger troubles to watch. 

Economic Calendar:

• 0830 am Canada Feb CPI (m/m) 0.1%p 0.6%e (y/y) 1.4%p 1.5%e / core 1.5%p 1.5%e
• 0830 am Canada Feb retail sales (m/m) -0.1%p +0.4%e /ex autos -0.5%p +0.2%e
• 0930 am Atlanta Fed Bostic
• 0945 am US Mar flash composite PMI 55.5p 55.2e / manufacturing 53p 53.7e / services 56p 56e
• 1000 am US Feb existing home sales (m/m) -1.2%p +2.2%e / 4.94m p 5.1m e
• 1000 am US Jan wholesale inventories (m/m) 1.1%p 0.3%e
• 0100 pm US Feb Treasury budget statement $9bn p -$22bn e