Monthly PMI Release May Spark Some Volatility Today

Markets

Bessent’s interview with Bloomberg offered a welcome distraction in yesterday’s generally dull trading session. The US Treasury Secretary touched on a range of topics, including on the US’ debt maturity profile. He ruled out terming out the debt for the time being, due to elevated inflation and the Fed being a competitive seller through QT. US yields eased a few basis points with the long end outperforming. German rates declined about 2 bps across the curve in technical trading. Bessent also tried to quell speculative market chatter about a potential gold revaluation of the US reserves. Such a one-off windfall would generate some $800bn out of thin air but is not what Bessent “had in mind” when he said he wants to monetize the US balance sheet. Gold prices eased from its intraday highs but still finished with a record. The US dollar fainted into late-European and US dealings even though risk sentiment was a bit shabby. EUR/USD surged towards 1.05. The trade-weighted index tested support at 106.35 (38.2% retracement on the Q4 rally). USD/JPY closed sub 150 for the first time since December only to reverse course this morning.

The monthly PMI release may spark some volatility today. The January edition for the first time since August of last year suggested the European economy eked out a bit of growth with the composite indicator venturing north of 50. Consensus expects this (painstakingly slow) bottoming out process to continue in February. The overarching PMI would rise from 50.2 to 50.5 on improvements in both manufacturing (47 from 46.6) and services (51.5 from 51.3). We hold a similar view. Barring (external) shocks, we think the European economy has seen the trough but lacks the drivers to get into higher gear for now. Unless the PMIs offer a positive surprise, it may be difficult for European rates to rally and EUR/USD to steam ahead beyond first resistance levels of 1.0533 and 1.0551. That’s particularly the case given event risk looming this weekend. German elections on Sunday could be a gamechanger, for the country and EU. The polls offer three scenario’s, assuming the far-right AfD (currently running at 20% in the polls) won’t be joining any coalition. The “Grand Coalition” of CDU/CSU and SPD (socialists) is the most market friendly one: it’s simply, straightforward and known territory. The “Kiwi Coalition” – CDU/CSU & the Greens – has never been tested on a federal level and ideological differences are larger than in a Grand Coalition. The least-favourable outcome is a three-way coalition (“Kenya”) with all of the above parties setting the stage for difficult and long negotiations. On one thing they all agree though: the debt brake must be adjusted or lifted to unlock a necessary fiscal impulse.

News & Views

The Japanese Statistics Bureau this morning reported inflation (ex. fresh food) rising further in January by 0.4% M/M and 3.2% (from 3.0%), slightly higher than expected. Core inflation ex. food and energy also rose from 2.4% to 2.5% while overall headline inflation accelerated to 0.5% M/M and 4.0% Y/Y (from 3.6%). The data add evidence to the upward price spiral that the BoJ is looking for even if it’s especially food prices that are rising (1.8% M/M and 7.8% Y/Y). Services inflation slowed to 1.4% Y/Y from 1.6%. For the BoJ to be sure that inflation is driven by higher wages, the services component preferably gets more weight as a driver for inflation. Even so, today’s report still supports the case for further BOJ policy tightening. In another release this morning, the composite PMI improved further in February from 51.1 to 51.6, the strongest pace in five months. The details of the report were a bit mixed. The modest improvement driven by sustained growth in services activity (53.1), while manufacturing output declined at a softer rate 48.6 from 47.3). New business increased for the seventh time in eight months, but the rise was assessed as modest. Orders for manufacturing continued to decrease but the decline was mild and more than offset by services. Confidence on activity growth over the next 12 months softened in February, to the lowest point since January 2021 on labour shortages, persistent inflation, and economic malaise in the domestic economy. Employment levels in the Japanese private sector rose at their slowest rate in just over a year. Additionally, the rate of input price inflation across the private sector was little changed from January’s historically sharp pace. Aside from the data, comments from BOJ governor Ueda this morning did catch the eye. On a question in Parliament, the governor indicated that the Bank is still ready to purchase government bonds if long term yields are rising too sharply. The 10-y yield (1.43%) recently rose to the highest level since 2009. While this in part may be driven by higher market inflation expectations, the BoJ signals that it still keeps a close eye on markets to develop orderly. The rise in LT yields slowed after the release (10-y currently minus 1.5 bp).