Pace of Indian activity growth slows in May

• The pace of growth in factory activity in India slowed in May according to the latest PMI surveys. Overall activity fell to 50.8, according to the index, from more than 55 a month earlier. The May print represents the lowest level of activity since July 2020. New orders and output fell as demand has likely been shaken by the need for economically important Indian states to impose lockdown measures to get Covid-19 cases under control.
• Manufacturing in the Eurozone remained buoyant in May with the headline index rising to 63.1 from 62.9 previously, a stronger outcome than flash estimates expected. France, Germany and Italy all reported a month/month acceleration in activity although output prices were at their highest levels as firms passed on higher input costs to consumers. Long delivery lead times, along with higher material costs, will fuel higher inflation in the coming months: headline Eurozone inflation rose by 2% y/y in May, accelerating from the 1.6% reported for April and faster than market estimates. The inflation print was the highest for the Eurozone since October 2018 and has been pushed higher mainly on the back of elevated energy prices.
• The ISM manufacturing index for the US rose to 61.2 in May from 60.7 a month earlier. Like we have witnessed in other high frequency data, the issue of supply shortages, whether in labour or material, is impacting operations and keeping input prices elevated. Supplier lead times hit their highest level in nearly half a century at 78.8 while backlog of orders increased to 70.6. While the overall output numbers suggests that the US economy is on a strong path for Q2 2021 markets should be bracing for the impact of higher inflation prints in the coming months and will likely battle against the Fed’s mantra that inflation is only transitory.

Today’s Economic Data and Events

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Fixed Income

• Treasury markets oscillated sharply overnight with 2yr UST yields moving between a range of 0.14%-0.149% while 10yr UST yields at one point spiked to as high as 1.64% before edging lower and closing around 1.61%. The persistently strong ISM may have helped to push yields higher in the early US session although they failed to hold on to their levels by the close.
• Turkey’s president, Recep Tayyip Erdogan, called for the central bank to lower interest rates as early as the July or August to, in his estimation, bring about lower inflation. Turkish inflation for May will be released on June 3rd with market expectations that it will remain high at more than 17%.
• Primary market activity has been quiet in the region.

FX

• The US dollar showed no real change overnight with the DXY index holding around 89.83. Despite a strong print from the ISM markets are likely waiting for a clearer catalyst from the NFP at the end of the week before moving higher or lower. EURUSD was generally lower by around 0.1%, slipping to 1.2213 while GBPUSD was the substantial mover on the day, slipping from its highest level since 2018 as concerns grow that as the UK economy opens, more Covid-19 variants will be able to spread easily.
• AUD was the standout among commodity currencies even as the Reserve Bank there kept policy on hold and pushed back against any near-term expectations for rates to go higher. AUD rose 0.26% to 0.7754 while both CAD and NZD were lower.

Equities

• The positive manufacturing data released yesterday was largely positive for European equities, although in the US it had more mixed results. The composite European index, the STOXX 600 climbed 0.8% to close at a new record high, with the DAX leading the pack with a 1.0% gain. Italy’s FTSE MIB (0.6%), France’s CAC (0.7%) and the UK’s FTSE 100 (0.8%) all also posted solid gains.
• In the US it was only the Dow Jones of the three major benchmark indices which ended the day higher yesterday, nudging up by 0.1%. The S&P 500 and the NASDAQ both ended the day down -0.1%. The strong data releases there are being tempered by persistent inflation concerns.
• Most regional equity markets closed the day higher, with the Tadawul up 0.4%, the ADX 0.8% and the DFM 1.4%. In Egypt, the EGX 30 closed down -0.7% and is now down -5.6% ytd.

Commodities

• Oil prices pushed higher in response to the OPEC+ meeting where the producers’ bloc rolled over their plan to increase output by 2m b/d between May and July but stayed quiet on their plans for the rest of the year. Brent futures did pop to USD 71.38/b at one point, near their year-to-date high, before retrenching and closing at USD 70.25/b, still a gain of 1.3%. WTI added 2.1% and settled at USD 67.72/b after hitting an intraday high of USD 68.87/b.
• OPEC+ officially gave no comment on the outlook for Iran to return to the oil market. Negotiations may have hit a stumble thanks to a release from the IAEA, the UN’s nuclear monitoring agency, that Iran has not been forthcoming about historic nuclear activity. A spokesperson for the government of Iran said that negotiators expected a deal to be reached only by August, pushing the timeline for a return of Iranian oil out further.

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