The latest developments are serving to strengthen existing
forces driving the foreign exchange market and producing a clear
divergence of performances against the U.S. dollar.
The firmness in the U.S. 10-year yield near 2%, the lack of much
push back from G7 officials about the yen's weakness, and soft
Japanese economic data (unexpected rise in unemployment and larger
than expected decline in household spending) provided the latest
incentives to encourage the push of dollar to new highs against the
yen to JPY92.30.
The euro is posting strong gains that began in Asia even before
the favorable euro-area economic data and is poised to challenge
the $1.37 area. The PMI data support ideas that the worst of the
recent economic downturn is over. The final manufacturing PMI was
reported at 47.9, which compares with the 47.5 flash reading and
46.1 reading in December. This is the highest in nearly a year.
There are a few high-level takeaways.
First, the Germany recovery appears to be gaining momentum at
the start of Q1. The manufacturing PMI rose to 49.8 from the 48.8
flash. Output and orders are back above the 50 boom/bust level.
Second, the weakness of the French economy and its divergence from
Germany, which we think is a critical development in the euro area,
continued. France confirmed its 42.9 flash reading, a four-month
low. Third, while Italy and Spain readings remain below 50, they
are at the highest levels (47.8 and 46.1 respectively) since
mid-2011. Fourth, Ireland surprised on the downside, slipping to
49.5 from 50.9 in December and is worth monitoring to see if it is
signaling a broader economic weakness.
The euro area also reported an unchanged unemployment rate for
December at 11.7%, after the November figure was revised down. The
consensus had been for an increase to 11.9%. Taken together with
the PMI data, the market may conclude that the ECB is unlikely to
lean against the passive tightening of financial conditions that
has seen Euribor rise around 25 bp since early December. That
passive tightening continued as the ECB announced that banks will
return another 3.5 bln euros from the LTRO.
Another theme that the market has been following is the weakness
of the UK economy and sterling's move out of the euro-orbit to some
extent. The CIPS manufacturing survey was disappointing and the
December report was revised lower. The January reading of 50.8
compares with 51.2 in December, which was revised from 51.4.
Sterling fell to session lows on the news, just above $1.58.
However, we suspect the market may be a bit too negative. It is the
first back-to-back reading above 50 since March-April last year.
Output itself rose to 54.2 from 53.4, which is the highest since
November 2011. New orders rose for the third consecutive month.
A case can be made that the weakness in Q4 GDP was also a bit of
a fluke (like the U.S., though for different reasons). For example,
without the closure of two North Sea oil platforms, GDP would have
been positive. The talk of a triple-dip seems to misconstrue the
recoveries. The UK economy has not recovered. U.S. and German GDP,
in contrast, is above pre-crisis levels. That is not true of the
UK. The economy is broadly stagnant in a trough. The government
insists on its austerity agenda and the BOE is currently saying
that there is little more than it can do.
Doubts about the recovery of the Chinese economy were sparked by
a unexpected decline in the official PMI and this contributed to
the extension of the Australian dollar to new lows for the year
The U.S. jobs and PMI will be the economic highlights of the
North American session. In some ways, given the Fed's commitment on
QE3+, the data needs to be significantly different from
expectations to alter the forces at work. U.S. jobs growth is
expected to be steady around the three- and six-month averages of
150-160k, which is shy of the 200k thought to be needed/desired.
The U.S. manufacturing sector remains a bright spot of the economy
and this should be reflected in the ISM reading. The consensus is
for a 50.6 reading after a revised 50.2 in December.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Inflation And Yields: The Evolution Of Gibson's
Paradox And The Revolution In Prices, Part V