US manufacturing PMI gains in May

• The US manufacturing PMI increased to 61.5 in the first half of this month, the highest reading since October 2009, and followed a final reading of 60.5 in April according to data released by IHS Markit. Demand continues to be powered by goods, as the pandemic keeps Americans at home, however backlogs of uncompleted work are piling up as manufacturers struggle to find raw materials and labor, boosting costs for both businesses and consumers. A vaccination drive that covered almost a third of the US population so far combined with a USD 6tn pandemic relief program provided by the government over the past year, is unleashing pent-up demand for services, while appetite for goods remains robust. The survey's measure of prices paid by manufacturers rose to the highest level since July 2008, backlogs of work accumulated early this month at the fastest pace in 14 years, new orders increased, and while factories tried to recruit more workers, the pace of hiring was the slowest in five months.
• The US National Association of Realtors said existing home sales dropped 2.7% to a seasonally adjusted annual rate of 5.85 million units last month, the lowest level since June. This marks the third straight monthly decline in sales, and comes as transactions fell in the Northeast, West and the densely populated South, while sales rose in the Midwest. The housing market is being driven by demand for bigger accommodations after the pandemic, as millions of Americans are forced to work from home. However, labor supply disruptions at sawmills and ports are causing shortages of lumber and other raw materials. There were 1.16 million previously owned homes on the market in April, down 20.5% from a year ago. At April's sales pace, it would take 2.4 months to exhaust the current inventory, down from 4.0 months a year ago. Houses typically remained on the market for 17 days in April, down from 27 days a year ago. 86% of the homes sold last month were on the market for less than a month.
• The Eurozone Composite PMI climbed to 56.9 in May from April's final reading of 53.8, its fastest pace in over three years according to a first reading by IHS Markit. The manufacturing flash PMI dipped from April's record high of 62.9 to 62.8, while the service industry flash PMI bounced to 55.1 from April's 50.5, with services firms benefiting from the release of pent-up demand. The new business index - which has been below 50 almost throughout the pandemic - soared to 56.7 from 49.7, its highest since January 2018. While manufacturing pressures saw the sub-index for raw materials soar to 86.5 from 82.2, its highest since the survey began in June 1997.
• The UAE's broad money supply growth (M2) slowed to 2.2% y/y in March from 4.9% in February. M1 growth remained strong at 18.4% y/y but quasi money (FX and longer term dirham deposits) declined -7.3% y/y.  Bank deposit growth slowed to 1.6% y/y from 2.8% in February, while gross lending by banks declined -0.8% y/y in March according to data from Haver Analytics. 

Today’s Economic Data and Events

No key events

Fixed Income

• In the US, fairly dovish FOMC meeting minutes saw yields on the 10-year UST slip to finish the week at 1.62%, off the 1.67% seen earlier in the week and down 1bps from the previous Friday. The two-year by contrast saw a modest rise in yields, closing the week at 0.1533%, from 0.1470% a week earlier.
• ECB President Christine Lagarde pushed back against the prospect of a sooner-than-signposted tapering of asset purchases by the single currency bloc’s central bank last week, contributing to the fall back in yields on the 10-year bund. The benchmark bond fell to -0.13% on Friday, after rising to a two-year high of -0.10% earlier in the week. The fallout from the crypto collapse also contributed to the drop, as investors looked for safer asset classes.

FX

• The dollar index closed the week at 90.017, marginally lower than the previous week’s level of 90.321, despite strengthening against the majors on Friday.
• The euro had been trading at levels last seen in January earlier in the week, before dovish comments by ECB President Christine Lagarde regarding the likelihood – or otherwise – of any imminent tightening of policy saw the single currency drop to close -0.4% lower at 1.2182, up marginally from the previous Friday’s close of 1.2141.
• The pound also weakened Friday, closing at 1.415, but during the week it had hit three-year highs, coming close to the levels seen in early 2018.

Equities

• Equity markets were mixed last week, although the prevailing move by the end of Friday was for a modest rise. The notable exception was in the US, where both the S&P 500 and the Dow Jones ended the week lower, by -0.4% and -0.5% respectively. The latest data might have been strong, but this is further fueling the reflation debate, despite the release of dovish FOMC minutes from the last meeting. The NASDAQ actually managed to secure w/w gains of 0.3%, despite a -0.5% drop on Friday.
• In Europe, the FTSE 100 ended down -0.4% w/w, but there were gains seen on the continent, as the composite STOXX 600 rose 0.6% w/w. The CAC closed flat and the DAX gained 0.1%, but Italy’s FTSE MIB closed 0.8% higher.
• In Asia, the Shanghai Composite lost -0.1% w/w, following a -0.6% drop on Friday as regulators warned again against bubble risks – especially those associated with cryptocurrency speculation. The Nikkei gained 0.8% w/w but remains down -2.4% m/m given the concerns over a resurgent coronavirus there that have troubled markets in recent weeks.
• In the region, the DFM closed up 1.5% on Friday for a 2.0% w/w gain, but it was the ADX that was the notable gainer, with strong rises at the start of the period leading to a 5.0% rise by the end of the week. The Borsa Istanbul gained 0.5% w/w but remains down -1.7% ytd.

Commodities

• Both major benchmarks closed lower last week. Brent futures lost -3.3% to close at USD 66.4/b, while WTI dropped -2.7% to USD 63.6/b. This was the worst week in over a month for the commodity, with seemingly positive noises coming out of discussions around the JCPOA and the potential return of Iranian crude to the market weighing on sentiment.
• Aside from these supply issues, the situation in India illustrates that demand is not guaranteed still either. As the country has struggled to contain high Covid-19 case numbers sales of gasoline have reportedly fallen -20%.

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