India PMI slips in May

• India’s manufacturing PMI fell to 54.6 in May from 54.7 a month earlier, according to estimates from S&P Global. The April print represents 11 months in a row of expansion and is sharply higher than 50.4 level recorded a year ago when India was enduring the throes of a major Covid-19 outbreak. Services data will be out later in the week with the PMI for April coming in a strong 57.9. India’s economy will be acutely exposed to higher global commodity prices and already the RBI has had to move with a surprise hike to try and push back against inflation.
• The unemployment rate in the Eurozone held steady at 6.8% for the third month running in April. Broader EU-wide unemployment also held steady at 6.2%. within the bloc, unemployment in Spain is the highest at 13.3% while in Germany, the labour market also appears stable with unemployment running at 3%. Economic conditions are set to weaken in the EU as the bloc grapples with high inflation and pending normalization of monetary policy. That may risk unemployment levels trickling higher in line with a broader economic slowdown.
• The US ISM manufacturing index rose to 56.1 in May, up from 55.4 a month earlier. That came in better than markets had been expecting although a sustained downtrend from peak levels in Q1 2021 remains intact. Like past readings, issues around supply chains, input prices and labour availability are all acting as headwinds to activity and the employment component fell into contraction territory for the first time since November 2020. Elsewhere in the US the JOLTS report showed there were 11.4m job openings in the US in April, down from 11.9m in March. The voluntary quits rate held steady at 2.9%.
• The Bank of Canada hiked policy rates by 50bps overnight, taking the overnight lending rate to 1.5%. The BoC cautioned that it may need to hike “more forcefully” if required to get inflation under control. While a series of large hikes had been expected, the language around the hike was much more hawkish than markets had been expecting and may serve to push market yields, the US included, higher.

Today’s Economic Data and Events

• 16:30 US Initial jobless claims May 28: 210k
• 18:00 US Factory orders April: forecast 0.7%
• 18:00 US Durable goods orders April: 0.4%

Fixed Income

• US Treasuries slumped overnight in response to better than expected ISM manufacturing data and a hawkish stance from the Bank of Canada. Yields on the 2yr UST added almost 9bps to settle at 2.6416% while the 10yr added 6bps to close at 2.9058%.
• European bond markets also closed lower with 10yr gilt yields up 6bps to 1.181% and the 10yr bund rising 5bps to 2.153%. Austria’s central bank governor, Robert Holzman, called for a 50bps hike at the July ECB meeting, saying it would send a “clear signal that the ECB is serious about fighting inflation.” Holzmann is among the most hawkish members of the ECB governing council.

FX

• The dollar jumped against peers overnight, abetted by another move higher in UST yields. EURUSD fell almost 0.8% overnight to settle at 1.065, hawkish commentary from ECB officials notwithstanding. GBPUSD sank more than 0.9% to 1.2487 while USDJPY added more than 1.3% to push back up above the 130 handle.
• In commodity currencies, USDCAD held up the best as the Bank of Canada hiked rates by 50bps though didn’t prevent the dollar’s general momentum from pushing the pair upward. USDCAD closed at 1.2657. AUDUSD was stable at 0.7175 while NZDUSD dipped by almost 0.5% to 0.6483.

Equities

• The trading day started mixed in Asia. In Japan the Nikkei closed up 0.7% as the yen weakened, but weak data out of China weighed on the Shanghai Composite, which closed down -0.1%, while the Hang Seng lost -0.2%. In India, the Sensex dropped -0.3%.
• A positive start in Europe turned negative later in the session, where the composite STOXX 600 initially traded higher before ending the day down -1.0%. The FTSE 100 also lost -1.0%, while the DAX dropped -0.3% and the CAC -0.8%. All three major US benchmarks closed down as the Dow Jones, the NASDAQ and the S&P 500 dropped -0.5%, -0.7% and -0.8% respectively.
• In Turkey, the Borsa Istanbul 100 closed up 0.9% to a new all-time high. The index is the strongest performer globally this year in local currency terms as residents look to hedge rapid price growth. CPI inflation hit 70.0% in April and is expected to have accelerated to 74.7% in May.

Commodities

• OPEC+ meets today and there is growing expectation that Saudi Arabia will respond to the sanctions that have been placed on Russia by hiking production to compensate for lost output. This will be among the most closely watched OPEC+ meetings in the past four months when previous sessions have quickly rubber stamped modest, and largely unachievable, output increases.
• Brent futures fell more than 5% overnight to USD 116.29/b and are pushing lower in early trade today while WTI settled up slightly at USD 115.26/b but is following Brent lower in early trading.
• Data from the API showed a draw in US crude inventories of 1.18m bbl last week along with a modest decline in gasoline inventories.

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