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IronFX Daily Commentary | China’s manufacturing PMI stays below the boom-or-bust level of 50 | 02/11/2015

02.11.2015, 10am

• China’s manufacturing PMI stays below the boom-or-bust level of 50. China’s manufacturing sector contracted for the eight straight month in October but at a slower pace. The Caixin manufacturing PMI edged up a bit to 48.3 from 47.2 previously, but stayed below the 50 mark dividing expansion from contraction. Coming on top of the official PMI released during the weekend, the soft readings reinforced the view that business conditions in China are continuing to deteriorate. Further contraction in activity raises concerns about whether the economy could see a modest recovery in Q4. As a result, we would expect the AUD and NZD to remain under pressure.

• Turkey election Turkey's ruling Justice and Development Party (AKP) has won the country’s parliamentary election, regaining the majority it lost in June. Months of political uncertainty, caused by the failure of coalition talks in the wake of an inconclusive election in June, had hurt the Turkish lira. Now that the uncertainty has decreased after these elections results, the outcome could favor the TRY at least in the short-run.

• Today’s highlights: During the European day, we get the final manufacturing PMIs for October from several European countries and the Eurozone as a whole. As usual the final forecasts are the same as the initial estimates, thus the market reaction on these news is usually limited, unless we have a huge revision from the preliminary figures. The UK manufacturing PMI for the same month is expected to have declined for the third consecutive month, which could prove GBP-negative.

• In the US, the ISM manufacturing PMI and the final Markit manufacturing PMI, both for October are also due out. The market pays more attention to the ISM index which is expected to have declined to its equilibrium level. A slight dip below 50 will be the first time the index will show contraction since November 2012. This could hurt the greenback.

• As for the speakers, Fed Chair Janet Yellen participates at the Financial Stability Oversight Council meeting, while the ECB Executive Board member Sabine Lautenschlager speaks at a conference

• As for the rest of the week, on Tuesday, the spotlight will be the RBA monetary policy meeting. At their last meeting, Bank officials decided to hold rates unchanged as expected, and maintained their neutral stance. They seemed relatively content with the softening conditions in China and the global equity market volatility. The global concerns have eased somewhat since then and given that last month they gave the impression that they are unlikely to lower rates in the near future, no action should be expected at this meeting. However, a couple of weeks ago, the country’s largest lenders decided to raise their mortgage rates. These moves, which tantamount to monetary tightening, could increase the pressure on RBA to cut interest rates at this meeting. Although the market expects the Bank to remain on hold once again, we believe that the probabilities for a rate cut have increased also thanks to the low CPI print since the prior meeting.

• As for the indicators, the UK construction PMI for October is forecast to have declined to 58.8 from 59.9. Given a possible decline in the manufacturing index, another decline in the construction could bring the pound under additional selling pressure and could increase speculation for a decline in the service-sector PMI due out on Wednesday. The US factory orders for September are also to be released and overnight we get New Zealand’s unemployment rate for Q3.

• On Wednesday, the main event will be the US ADP employment report for October, two days ahead of the NFP release. The ADP report is expected to show that the private sector gained fewer jobs in October than it did in the previous month, where the print hit the crucial 200k level. The ISM non-manufacturing PMI and the final Markit service-sector PMI, both for October, are coming out as well.

• On Thursday, the main event will be the Bank of England monetary policy meeting. With no change in policy expected, the number of dissenting votes is the key point again. The consensus is that the vote will once again be split 8-1 with Ian McCafferty to maintain his call for a rate rise. Market participants will be eager to see if McCafferty is joined by the formerly hawkish Martin Weale or Kristin Forbes, who argued that the underlying inflation should start to pick up soon and that monetary policy would need to be tightened sooner. Thursday’s meeting will also be accompanied by the BoE’s quarterly inflation report for November. Bank officials could lower their near-term GDP growth and CPI forecasts given the lower than expected preliminary GDP for Q3 and near zero inflation for most of this year. The impact on GBP however will highly depend on the extent of the revision and on the tone of the meeting minutes.

• On Friday, all eyes will be on the US employment report for October. The report is expected to show an increase in payrolls of 180k, up from 142k in September. Even though the figure is expected to remain below 200k, recent comments from Fed officials showed that they are comfortable with below 200k readings. Therefore, the market is likely to focus more on the unemployment rate and average weekly earnings. The unemployment rate is expected to have remained unchanged at 5.1%. The average hourly earnings will be important as well. We need to see strong wage growth to assume that the labour market has indeed strengthened at the point it would support a Fed lift-off.

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