Factories power ahead in February

• The US ISM Manufacturing PMI rebounded to 60.8 last month from 58.7 in January, the highest level in three years as new orders surged. A drop in new coronavirus infections, in addition to the near USD 900bn in additional Covid-19 relief money from the government are indicating Q1 economic performance will be robust. Supply chain bottlenecks, however, have raised production costs for manufacturers: the survey's measure of prices paid by manufacturers jumped to a reading of 86.0 from 82.1 in January, the highest since May 2008. The ISM's forward-looking new orders sub-index was up to a reading of 64.8 last month from 61.1 in January. Factories also received more export orders and order backlogs grew, with factories stepping up hiring last month as a result. The survey's manufacturing employment gauge rose to 54.4, the highest reading since March 2019, from 52.6 in January. A separate report from the US Commerce Department on Monday showed construction spending was up 1.7% to USD 1.521 trillion in January, the highest level since the government started tracking the series in 2002. Construction spending rose 1.1% in December
• Euro zone factory activity surged in February to one of the highest readings in the survey's 20-year history. The IHS Markit's final Manufacturing PMI jumping to a three-year high of 57.9 in February from January's 54.8, ahead of the initial 57.7 "flash" estimate. Supply shortages caused input costs to jump to the fastest level in a decade, with the input prices PMI bouncing to 73.9 from 68.3. The output index climbed to 57.6 from 54.6 on strong demand. Strong demand for manufactured goods pushed factories to increase staffing levels for the first time in nearly two years
• The UK IHS Markit/CIPS Purchasing Managers Index rose to 55.1 last month, up from 54.1 in January. The reading was above a flash estimate of 54.9. Much of the rise probably reflects longer delivery times and higher costs - which historically were linked with increased activity but more recently have represented supply and Brexit constraints. Confidence for the year ahead was its highest in more than six years, despite the new post-Brexit customs rules which took effect in January and increased the cost and complexity of trade with the European Union. Materials costs rose at the fastest clip in four years and delivery times were sharply higher too.
• In data released yesterday, Turkish GDP expanded 5.9% y/y in Q4 2020. This was down from the (downwardly revised) 6.3% recorded in Q3, and missed expectations of 6.9% growth. On a quarterly basis, growth was 1.7% q/q, missing projections of 3.9%. Nevertheless, this was still the strongest growth rate recorded among major economies in the period, and helped Turkish growth over 2020 to come in at 1.8%, one of the very few countries to post positive growth last year. Manufacturing preformed particularly well, expanding by 10.5% y/y in Q4, as did information & communication which grew 15.1%. The underperformer was the construction sector, which was -12.5% smaller in Q4 compared to the year previous. From a real growth perspective, the Turkish economy benefitted from a credit boom and loose monetary policy in 2020, but this came at a price to macroeconomic stability and to the value of the lira. Looking ahead, the hawkish monetary stance adopted by TCMB Governor Naci Agbal since his appointment in October should help stabilise financial markets in 2021, while a recovery from the Covid-19 pandemic – not least in the tourism sector – will help maintain a robust growth rate even under tighter monetary policy. The manufacturing PMI for February, also released yesterday, slowed to 51.7 in February (from 54.4 the previous month), but it remains positive, and stronger than the neutral 50.0 averaged over 2020.

Today’s Economic Data and Events

• 7:30 AU RBA Interest Rate Decision (Mar) Forecast 0.10%
• 7:30 AU RBA Rate Statement            
• 12:55 GE German Unemployment Change (Feb) Forecast -15K
• 14:00 EU CPI (YoY) (Feb) Forecast 1.00%
• 17:30 CA GDP (MoM) (Dec) Forecast 0.30%

Fixed Income

• After last week’s histrionics bond markets started March on a much more placid footing. Further signs of economic health in the US—the ISM manufacturing index gained to 60.8 in February from 58.7 a month earlier—helped to keep a floor under USTs at around levels they ended the last week. Yields on 2yr USTs closed slightly lower at 0.1191% while the 10yr managed a 1bp rise to 1.417%.
• Elsewhere bond markets showed much more improvement with sizeable drops in yields across the UK, Germany and France. Central bankers continue to talk up their capability to buy up government bonds to help bring down yields with the RBNZ’s assistant governor the latest to intervene. Eyes this morning will be on the RBA decision and any commentary in the run up in yields there.
• Emerging markets caught a little bit of relief overnight with 10y yields lower on South African (down 8bps to 8.957%), Turkish (down 3bps to 12.83%) and Indian bonds (down 2bps at 6.208%).

FX

• It was a bipolar experience in G10 currency markets with EUR, JPY and GBP all losing ground against the USD overnight while CAD, AUD and NZD rallied. The broad DXY index rallied 0.18% overnight to settle at 91.039 with EURUSD showing the most downside, falling 0.22% to 1.2049. Sterling was off by a more muted level but remains below 1.40 while USDJPY continues to push above 106 with 107 potentially in sight.
• AUD will be in focus this morning ahead of the RBA decision after it rallied almost 0.9% overnight. USDCAD fell 0.7% even as oil prices sold off ahead of the OPEC+ meeting later this week.
• EM currencies were mixed but some managed to recover some ground after heavy selling last week. USDTRY moved to 7.289, down 1.8% while ZAR closed below the 15 handle, appreciating 0.8% against the USD. USDINR, however, held on to its higher levels, moving up 0.11% to 73.55.

Equities

• Global equities rallied yesterday, paring the losses seen last week. In the US, the S&P 500 enjoyed its biggest one-day rise since June, climbing  2.4%, while the Dow Jones added 2.0% and the NASDAQ 3.0%. Easing turbulence in the bond market, momentum behind the Biden stimulus package and the approval of the Johnson & Johnson vaccine likely all contributed to the bullish tone.
• Gains in Europe were similarly strong, as the FTSE 100, the CAC and the DAX all gained 1.6% yesterday.
• In Asia, the Shanghai Composite closed 1.2% higher and the Nikkei 2.4%, although both are moving lower in early trading this morning, down -0.3% and -0.4% respectively.
• Within the region, the DFM closed flat yesterday while the Tadawul lost -0.1%.

Commodities

• Oil prices fell to start the month with the active May Brent contract down 1.1% overnight to 63.69/b and pushing lower today. WTI futures fell 1.4% overnight to USD 60.64/b and are below USD 60/b in early trade today. The OPEC+ joint technical committee will meet later today to assess market conditions and provide an assessment for the ministers who will meet later this week.  
• Gold extended its decline overnight, falling an addition 0.5% to USD 1,725/troy oz and is continuing to fall in trade today. A strong risk on move in equity markets sapped interest away from non-yielding gold while the improvement in US real yields is also detracting interest away from precious metals.

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