Thursday 21 June 2018

Daily Market Update: Euro area composite PMI slips further in April; focus switches to the Fed this week

US Federal Reserve Chair Janet Yellen
US Federal Reserve Chair Janet Yellen

Friday’s flash PMIs from the euro zone were a touch weaker than expected with the April reading of the Composite PMI declining marginally to stand at 53 from 53.1 in March.

While this leaves it at a 15-month low and running lower than the 53.2 average recorded in Q1, it is still consistent with quarterly GDP growth of around 0.3-0.4% i.e. in line with the latest ECB staff projection. Nevertheless, the latest decline hints at a possible further slippage in growth momentum and highlights that growth risks in the zone remain tilted to the downside, thus keeping open the debate about the possible need for the ECB to do more.

Attention this week turns to the Fed whose April policy meeting concludes on Wednesday evening. Following Yellen’s recent dovish update, there is no action expected at this meeting. Rather, the key question is the extent to which the post-meeting statement may seek to shape expectations about future policy beyond this week. Given mixed news on the economy lately (several indicators point to a weak Q1 GDP reading of around 0.5% annualised, though the labour market looks to be continuing to improve nicely), we don’t expect the Fed to indicate a firm intention to hike rates imminently. However, recent improvements in financial market conditions and inflation expectations and a weaker dollar suggest that risks from global economic and financial developments have eased. And several measures of core inflation continue to trend higher, notwithstanding the slight pull-back in core CPI inflation in March.

Note, that there’s a longer gap between this week’s April meeting and the next one in June than there was between March and April which means, among other things, that the Fed will have two jobs reports to digest by the time it meets on June 15th. Note also that the UK referendum post-dates the June Fed announcement which perhaps argues for the Fed to stay cautious until after the outcome of the vote is known. But for now, we expect the language in this week’s statement to keep the door very much open on a possible June/July move, depending on how the incoming news flow turns out. For a market that doesn’t have the next US rate hike fully priced until Q1 of next year, that message might lend some modest to the dollar. But in truth, a strong Fed-induced dollar rally is unlikely until markets get a stronger sense that Yellen et. al. are getting close to pulling the trigger again.

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