Macro data out in the past 24 hours have done little to assuage market concerns about the risk of global deflation but dovish comments by the Federal Reserve have given US equities a boost today and pushed the Dollar weaker for the third consecutive session.
In the US, the ISM manufacturing PMI fell from 52.8 in April to 52.1 in May, its lowest level since October 2016, suggesting that US GDP growth likely slowed in Q2 from 3.1% qoq annualised in Q1 and markets will now be focussed on tomorrow’s release of non-manufacturing PMI data. The Federal Reserve is clearly paying attention, with voting FOMC member Bullard saying yesterday evening that a rate cut may be warranted soon. Chairperson Powell in a speech this afternoon was not as dovish but did seem to slightly soften his tone, arguing that the Fed would respond “as appropriate” to the risks posed by a global trade war and other recent developments.
These twin comments appear to have masked for now disappointing US macro data. The S&P 500 is up 1.6% at time of writing, wiping out the cumulative losses posted on Monday and last Friday. The Dollar trade-weighted index, which on Friday hit its strongest level since end-December, has since weakened about 0.4%.
The macro picture in the UK remains at best tentative. The manufacturing PMI dropped to 49.4 in May, the first time it has been below 50 since July 2016, indicating that manufacturing activity contracted last month. The British Retail Consortium’s latest report, out this morning, has total sales falling 2.7% yoy in May – the largest year-on-year fall ever recorded. While this number was likely dragged lower by unfavourable base effects – retail sales were particularly strong in May 2018 – retail sales growth has clearly slowed sharply following a robust Q1. Nevertheless, Dollar weakness has helped the GBP/USD cross rally to 1.268 – its strongest level since 28thMay.
It has been a similar story in the Eurozone. Despite core CPI-inflation falling from 1.3% yoy in April to a one-year low of just 0.8% yoy in May, EUR/USD has surged to 1.1255 – its strongest level since mid-May. However, Euro volatility is likely to remain elevated in the run-up to Thursday’s ECB policy meeting.
