EUR pressured as cyclical outlook deteriorates

EUR: Flow of data suggests energy-bounce support fading

EUR/USD remains under downward pressure with further economic data releases like the factory orders data yesterday from Germany weaker than expected. Industrial production data today also came in weaker than expected although did manage a m/m gain of 0.3%, less than the 0.6% expected after a large 2.1% drop. That followed Spanish industrial production data yesterday that was much weaker than expected. The NSA YoY rate fell 4.0% in April, which was the worst reading since January 2021 when covid was still undermining economic activity. The Manufacturing PMI index at 44.8 certainly doesn’t suggest there will be any imminent turnaround in the renewed weakness in industrial production. After a turnaround in optimism in Q4 last year into Q1 this year, it seems that the energy price drop trigger for improved confidence is now fading. Euro-zone retail sales data for April, also released yesterday revealed unchanged m/m growth, weaker than expected. With the consensus for real GDP growth barely positive, it won’t take much more weak data to signal GDP contraction.

The good news of course is that the flow of data will only reinforce the prospect of a continued decline in inflation. ECB data yesterday revealed that consumer inflation expectations in 12mths time fell notably in April, from 5.0% in March to 4.1%. Three-year inflation expectations fell from 2.9% to 2.5%. 2yr yields in core Europe fell further on the back of the data with the ECB set to meet next Thursday.

We don’t see the recent data as enough to alter the thinking at the ECB. Of course a 25bp hike next week is a done deal but the flow of data does certainly raise the risk of the markets debating more seriously the prospect of a rate hike in July. 25bps is close to fully priced for next week but over the next two meetings, the OIS market indicates about 42bps of tightening, down modestly since towards the end of May. But we believe a more abrupt turn in activity data would be required to alter the ECB’s thinking on delivering two further rate increases. President Lagarde spoke yesterday in the European parliament and stated that “price pressures remain strong” repeating the guidance that policy rates would be brought to a level to achieve price stability. With the hawks suggesting more than two hikes may be needed (Nagel), delivering two more hikes before the summer break seems most likely.

Weaker industrial production data and falling inflation in the euro-zone does shift the near-term balance of risks more to the downside for EUR/USD but it is most likely we will see consolidation at these levels into the CPI data on Tuesday and then the FOMC on Wednesday and ECB meeting on Thursday.

CYCLICAL UNDERPERFORMANCE IN EURO-ZONE SUPPORTING USD

Source: Bloomberg, Macrobond & MUFG GMR

CNY: China trade data adds to growth concerns

China trade data released today was weaker than expected although there has been limited impact specifically on USD/CNY. However, it is another factor that is currently helping provide general support for the US dollar. Last month exports surprised to the upside but in the May data released today exports fell back, declining by 7.5% from a year earlier compared to a market consensus of a 1.8% drop. Imports were also weak although not as weak as expected, declining 4.5%. China imports were weak from most major areas globally but there were declines of 22.8% from South Korea and 23.1% from Taiwan highlighting continued tech weakness while imports from the US weakened to -9.9%.

There was one bright spot in the trade data with the import volumes of certain commodities picking up. Copper imports accelerated from 11.6% to 16.8% while crude oil volumes grew 12.3% versus -1.4% in April. Iron ore volumes also grew and this data may indicate some pick-up in infrastructure construction activity helped by China’s ongoing policy support.  

Nonetheless, the overall picture of the data is that the global growth backdrop remains weak. Asian equity markets were mixed but the Hang Seng China Enterprise index outperformed and there remains hope of policy stimulus steps in China being announced. This hope was strengthened by the authorities requesting the large banks to lower their deposit rates on demand and time deposits. Five to ten basis point declines will hardly make much difference and hence there is an expectation of further fiscal stimulus support being announced.

The mixed global growth backdrop remains supportive for the dollar at this stage. As stated above, consolidation at these stronger US dollar levels seems most likely given the probable declining appetite for position-taking ahead of a key week next week with the US CPI data and the FOMC and ECB meetings.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	08:50	ECB's De Guindos Speaks	--	--	--	!!
IT	09:00	Italian Retail Sales (YoY)	Apr	4.3%	5.8%	!
IT	09:00	Italian Retail Sales (MoM)	Apr	0.3%	0.0%	!
EC	10:10	ECB's Panetta Speaks	--	--	--	!!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-3.7%	!
CA	12:00	Leading Index (MoM)	May	--	-0.11%	!
US	13:30	Trade Balance	Apr	-63.30B	-64.20B	!!
CA	13:30	Labor Productivity (QoQ)	Q1	0.2%	-0.5%	!!
CA	13:30	Trade Balance	Apr	0.20B	0.97B	!!
CA	15:00	BoC Rate Statement	--	--	--	!!!!
CA	15:00	BoC Interest Rate Decision	--	4.50%	4.50%	!!!!
US	20:00	Consumer Credit	Apr	16.50B	26.51B	!
NZ	23:45	Manufacturing Sales Volume (QoQ)	Q1	3.9%	-4.7%	!

Source: Bloomberg