Market risk sentiment has been really sensitive lately. The normal drift higher during summer dynamics has been interrupted by a series of bad news. So, it’s not surprising that a data series which usually affects the markets’ mood will get extra attention this time around.
Typically, Manufacturing PMIs shake up market sentiment, as they are often a predictor of economic dynamism. Slower than expected PMIs often lead to an uptake in safe havens; while more active PMIs will often support-risk on. Tomorrow’s series of preliminary PMIs from major countries could shake up the markets quite a bit.
What’s driving sentiment?
Why investors are extra nervous right about now is because the underlying assumptions for the year are shifting. Up until quite recently, the consensus among economists was that China would roar ahead thanks to reopening after the pandemic. The US would slip into some kind of recession driven by prices outstripping the growth in wages, along with higher finance costs as part of the Fed’s fight against inflation.
But, it seems the situation is reversed. China’s economy is struggling, while the US is showing surprising resilience. As economists readjust their outlook, traders are left in an uncertain position. That makes it harder to jump on risk, and safe havens become increasingly attractive. In that environment, a signal from the PMIs that the economy is doing better or worse than expected could drive a stronger move than usual.
What to look out for:
Australia: Is expected to see its manufacturing PMI regain expansion at 50.1 from 49.6 prior, which could provide substantial relief to the AUD. The Aussie has been under pressure over concerns that the sliding housing market in China would see less demand for raw materials. Though the price of iron ore has so far managed to remain above $100/ton.
France: is often what sets the tone for the EuroZone, as the first of the large countries to report. Manufacturing PMI is expected to stay broadly in contraction, but stage a minor recovery to 45.9 from 45.1 prior.
Germany: As the largest economy in the EuroZone, it has a strong potential to shift the outlook for the Euro. Here PMIs are expected to see a recovery to 41.0 from 38.8 prior, as traders might be hoping Germany can start growing again.
UK: is expected to see its Manufacturing PMI to remain essentially flat, just a tick lower at 45.2 compared to 45.3 prior. The emphasis is likely on the BOE expected to keep tightening to bring inflation down while other central banks can start lifting the pressure. The latest retail sales data suggests that the effects of higher rates are finally filtering through to the consumer.
US: Finally, the world’s largest economy is expected to stay marginally in contraction at 49.5, which is an improvement from the prior 49.0 reading. But there is a chance that the dollar could gain either way. A stronger-than-expected result would support the idea that the US is managing a soft landing and make the dollar more attractive. A weaker-than-expected result could lead to considerations that a recession is, in fact, a strong possibility and that could mean holding dollars would be safer.
