Risk appetite this week has been a bit sluggish. The best example of that is the new highs in gold at the start of the week. The market appears to be dominated by a narrative of “higher for longer” out of central banks following a series of disappointing data points.
But, that might turn around tomorrow with the first look at PMIs from key countries for the month of May. This data is important because it is the freshest take on the state of the economy. While a consensus has formed that the global economy has escaped a recession this time around, just how fast it will be growing can be pivotal for currencies.
Setting the Tone for the Markets
Central banks are headed into a period of “rate normalization”. Just how fast they get around to cutting (or, in the case of the RBA, if they do the final hike) will likely depend on economic growth. In the case of Europe, that’s more economic recovery than growth. But, either way, if the economy grows steadily, then central banks will be cleared to slowly bring rates down.
But, if the economy jumps ahead too fast, then it can cause its own inflation. That would likely lead to central banks holding rates higher for longer, and weigh on commodity currencies in particular. With the RBA, for example, set to keep rates high; other central banks easing could bring back carry trading the Aussie. Therefore, it’s not just that central banks are easing, but how fast, and which is cutting first.
What the Data Says
First to report Preliminary May PMIs is Australia, with the focus likely on the manufacturing number, as it is expected to pop back above 50 and return to expansion. That would put pressure on the RBA to keep rates higher.
Japan’s continuously expanding PMIs are expected to support speculation that the BOJ will keep tightening, with rumors that a rate hike might happen as soon as the next meeting.
French PMIs are particularly relevant, because it’s the first major country of the Euro Area to report. With the ECB waiting for inflation in the services sector to come down, here French Services PMI might be more important, particularly if it goes above last month’s 51.3, indicating that the sector remains active and prices could remain high.
German PMIs are next, but here the focus will likely be on the manufacturing sector, which is a key indicator of growth for the Euro Zone. That has been in contraction for nearly two years, but is expected to post a rebound to 44.0 from 42.5 prior. That would support hopes that the shared economy is improving, but keep the ECB on track for a June cut.
The UK’s composite PMI has already turned to expansion as the country continues its rebound from last year’s recession. After CPI came in a little hotter than expected today, the focus will be on whether the manufacturing PMI figure makes it over the 50 level and confirms that the economy is going fast enough to put doubts in the BOE’s rate cutting plan.
Finally, the US economy has been roaring ahead and keeping the Fed from cutting rates as initially expected. The expectation is that May flash PMIs will confirm that trajectory having a modest increase over the 51.3 recorded last month.
