Euro Dips Mildly after France and Germany Inflation, Risk Aversion Continues

Risk aversion is the main theme in the markets today, as selloff in stocks started in Asia following poor data from China, and continued through European session. Dollar and Yen are holding firm as the strongest ones for now. Euro traded a touch lower after lower than expected inflation readings in France and Germany, but downside is so far limited. European majors are still relatively supported by buying against commodity currencies. New Zealand and Australian Dollar are staying as the worst performers.

Technically, development in EUR/AUD is worth a watch on whether selloff in Aussie would intensify. Break of 1.6514 temporary top will confirm resumption of whole rebound from 1.6134. This rally is either the second leg of the pattern from 1.6785, or resuming the larger up trend. But in either case, next target will be a test on 1.6785 high.

In Europe, at the time of writing, FTSE is down -0.19%. DAX is down -0.48%. CAC is down -0.81%. Germany 10-year yield is down -0.042 at 2.293. Earlier in Asia, Nikkei dropped -1.41%. Hong Kong HSI dropped -1.94%. China Shanghai SSE dropped -0.61%. Singapore Strait Times dropped -0.90%. Japan 10-year JGB yield dropped -0.0037 to 0.433.

Canada GDP flat in Mar, up 0.8% qoq in Q1

Canada GDP was flat at 0.0% mom in March, slightly above expectation of -0.1% mom. Services-producing industries was flat while goods-producing industries contracted -0.1% mom. Overall, 12 of 20 industrial sectors posted increases in March.

In Q1, GDP grew 0.8% qoq, after posting no change in the previous quarter. That’s the fastest pace since Q2 of 2022. Goods-producing industries edged up 0.1%, partially offsetting the decline observed in the final quarter of 2022. Service-producing industries were up 0.9%, rising for a seventh consecutive quarter. Overall, 16 of 20 sectors recorded gains.

ECB’s Villeroy foresees declining inflation in France, highlights monetary policy impact”

Francois Villeroy de Galhau, a member of ECB Governing Council, has offered an outlook on inflation in France, stating, “We’re very likely there. It’s even likely that we’ve passed the peak and so inflation will come down in France, as we said, between now and the end of the year, even if it won’t be sufficient.”

Villeroy shed light on the apparent decrease in what’s known as ‘underlying’ inflation. The ECB official posited, “Part of this can doubtless be attributed to the first effects of monetary policy transmission.” However, he expressed this viewpoint cautiously, adding, “But I say this with caution.”

He further stressed the importance of the duration of current interest rates, stating, “I think this morning’s figure is a further sign that, rather than the level of the terminal rate, on which a lot of attention is focused, it’s how long we remain there that is essential.”

Villeroy’s commentary arrived following the release of data indicating that the CPI in France dipped from a 6.9% year-on-year increase to 6.0% in May, a figure that came in below the expected 6.4% rise.

From Germany, CPI slowed from 7.2% yoy to 6.1% yoy in May, below expectation of 6.5% yoy.

China’s manufacturing PMI slides to five-month low as economic recovery stumbles

China NBS PMI Manufacturing dropped from 49.2 to 48.8 in May, below expectation of 49.4. That’s the lowest level in five months. New orders sub-index followed suit, slipping from 48.8 in April to 48.3 in May, while the new export orders sub-index descended from 47.6 to 47.2.

PMI Non-Manufacturing dropped from 56.4 to 54.5, below expectation of 54.9, lowest growth in four months. The official composite PMI, encapsulating both manufacturing and services activity, fell from 54.4 in April to 52.9 in May.

“China’s economic-prosperity level has receded, and the foundation for recovery and development still needs to be consolidated,” said NBS senior statistician Zhao Qinghe.

Japan industrial production down -0.4% mom in Apr, retail sales disappoint

Japan’s industrial production experienced a contraction of -0.4% mom in April, a significantly worse result than expectation of 1.4% mom growth.

According to survey by the Ministry of Economy, Trade and Industry, manufacturers are forecasting an output increase of 1.9% in May and 1.2% in June. This rise is expected to be driven by an easing in parts shortages, which should lift production in transportation and production machinery.

Despite these projections, a METI official struck a more cautious note, stating, “The current production sentiment is still bearish due to ongoing concerns about the downturn in overseas economies.”

Meanwhile, the country’s retail sales also delivered disappointing results. They rose 5.0% yoy, falling short of the anticipated 7.1% yoy increase. On a month-on-month basis, retail sales contracted by -1.2% in April, reversing the 0.3% gain recorded in March.

Australia CPI jumped back to 6.8% yoy in Apr, ex-volatile items down to 6.5% yoy

Australia monthly CPI jumped from 6.3% yoy to 6.8% yoy in April, well above expectation of 6.4% yoy. Excluding volatile items of automotive fuel, fruit and vegetables and holiday travel, CPI slowed from 6.9% yoy to 6.5% yoy.

Michelle Marquardt, ABS head of prices statistics, said: “It’s important to note that a significant contributor to the increase in the annual movement in April was automotive fuel. The halving of the fuel excise tax in April 2022, which was fully unwound in October 2022, is impacting the annual movement for April 2023.”

New Zealand ANZ business confidence rose to -31.1, RBNZ back at hike by year-end

New Zealand’s ANZ Business Confidence Index climbed from -43.8 to -31.1 in May, offering some positive news for the economy. Own Activity outlook also edged higher, moving from -7.6 to -4.5.

A more granular look at the data reveals that export intentions went up from -1.5 to 2.0, while investment intentions remained steady at -6.8. However, employment intentions slid from -2.4 to -5.7.

Pricing intentions dipped slightly from 53.7 to 52.4, while cost expectations barely shifted, coming down from 84.2 to 84.1. Profit expectations saw a significant uplift, rising from -37.7 to -27.4. Inflation expectations also moderated, falling from 5.70% to 5.47%.

ANZ commented on the findings, noting that while RBNZ may view the economy as broadly sluggish, the picture isn’t entirely clear. In their words, “Things are patchy, certainly, but most activity indicators are well off their lows and rising, while cost and price indicators are inching lower, rather than plunging.”

In light of these developments, ANZ continues to predict that RBNZ will resume rate hikes by the end of the year, potentially countering the additional stimulus from robust net migration and higher fiscal spending than anticipated. “We continue to expect that the RBNZ will be back at the hiking table by the end of the year.”

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0689; (P) 1.0718; (R1) 1.0763; More…

EUR/USD’s fall from 1.1094 resumed after brief recovery and intraday bias is back on the downside. Current fall is seen as corrective the whole up trend from 0.9534. Deeper fall should be seen to 1.0515 cluster support, 38.2% retracement of 0.9534 to 1.1094 at 1.0498. On the upside, break of 1.0745 resistance will indicate short term bottoming. Stronger rebound would be seen back to 55 D EMA (now at 1.0836).

In the bigger picture, as long as 1.0515 support holds, rise from 0.9534 (2022 low) would still extend higher. Sustained break of 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 will solidify the case of bullish trend reversal and target 1.2348 resistance next (2021 high).

Economic Indicators Update