Posted on: 02 March 2016, by: Pepperstone Support, category: Market Review
The divergence trade is looking like a “reborn again bull” for the US economy, which for now, shows resilience to sluggish growth prospects elsewhere. Strong ISM manufacturing, construction spending and auto sales on Tuesday. We now have 20bps of hikes priced-in from the Fed through December 2016. That’s clearly enough to ward off the negative rates enthusiasts; the question now, is that still too little? Keep in mind that the next big data point is NFP on Friday.
Oil isn’t decisively screaming bullish but it’s at least looking more constructive. WTI saw a mid-session sell-off stop at 33.40 and has corrected to 34.35. API causes WTI to trade below $34.00.
Equities, even during oil slippage, staged a solid performance on Tuesday. S&P closed 2.20%. That’s the highest close since January 6. US fixed income stubbornly held a bid into US data but thereafter, US 10y yields climbed about 10bps towards 1.84%.
FX volumes have been very sluggish recently, especially around data and events. This was not the case on Tuesday: market volumes picked up significantly following the US data, as well as an unscheduled, dovish letter from Super Mario at the ECB.
Gold fell as risk sentiment improves. But not enough (yet) to suggest a trend has started.
Into the Asian open, USDJPY is testing a key 114.00/113.80 resistance area. USDJPY was one of the main pairs that we saw thematic demand over the NY session, along with USDMXN and USDZAR.
As for the US data that moved the needle:
This could be a turning point for US manufacturing, said Bradley Holcomb, chair of the ISM Survey, after the ISM survey. An improvement from 48.2 to 48.5 was expected and the ISM bounced back to 49.5. It included healthy readings for both new orders (51.5) and production (52.8), while employment bounced back to 48.5 after an extremely low January reading.
Strong construction spending data ( 1.5% versus 0.3% expected) arguably proved more interesting to investors, though Citi Economics does not expect gains of similar magnitude to persist. That is because the public sector, up 4.5% comprised of most gains. Comparably, private spending was up 0.5%. There was also a string of positive US automobile sales reports.
The only disappointment: Atlanta GDPNoW pushed its forecast down to 1.9%. Construction spending was a plus but they lowered expected consumer spending because of ISM.
JPY vols saw a big move lower in risk premium from the London open; that continued in NY. The 2w, which captures the next BoJ meeting, moved down from 14.25 at the NY open to 14.0 as of now. 1m fell from 12.9 to 12.46.
For the record, Eurozone manufacturing PMI was revised up from 51.0 to 51.2 in the final February reading, but still marks the lowest reading in 12m and down. Expansions in production, new orders, new export business and employment all lost momentum.
EURGBP didn’t do much in NY but we continue to watch for a downside break of 0.7750. Significant if seen.
UK manufacturing PMI dropped to 50.8 in February, weakest since April 2013 and well below the forecasted 52.3. Price pressures remained on the downside during February, as both input costs and output charges fell further.