Morning Commentary: False Dawn

Foreign Exchange - Morning Commentary
False Dawn
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last Friday, euro area flash PMI numbers surprised markets by beating on both manufacturing and services.  Notably, Germany’s manufacturing PMI number made a significant improvement, moving up to 47.8 from 45.3. 

The February PMI numbers were much anticipated by the markets as it provided the first glimpse into how the SARS-CoV-19 virus was affecting the European markets given Europe’s large exposure to China.  By surprising to the up side, PMI data suggests that domestic demand is in better shape than the markets thought. 

With regards to the positive PMI numbers themselves, it is possible that something is amiss with the supply chain picture.  Per the PMI details, the materially positive contribution to the PMI number from the increase in deliveries is at odds with a modest improvement in new orders.  This hints that the positive PMI number might not reflect an increase in demand.   On a broader level, it is still unclear how long supply chain disruptions will last even if assuming the worst is behind us. 

This isn’t to dismiss the positive number but simply to suggest that caution would be advisable.  Clearly a beat is better than a miss, and ECB officials are certainly breathing a sigh of relief that the euro area economy is proving more resilient than expected against the SARS-CoV-2 virus.  To this point, it is important to remember that this is just one data point and the SARS-CoV-2 outbreak is still evolving.  Case in point, news over the weekend brought reports of a surge in cases outside of China leaving the ultimate impact unclear. 
  • German IFO data beat expectations on the business climate, expectations and current assessment level.  This builds on the flash PMI beat last week.  However, COVID-19 cases are spiking outside of China, with Korea, Japan, Iran and Italy in focus.  Equity markets around the world are down sharply as risk appetite has pulled back.  
  • The US yield curve continues to invert with the 3 month/10 year curve at its most inverted level since October 4.  The US 10 year yield is ~4 bps away from its all-time low level set in 2016. 
  • Mexican inflation missed expectations with YoY CPI coming in at 3.52% against expectations for a 3.56% print.  Banco de Mexico will release its quarterly inflation report Wednesday.
  • The Hamburg elections brought another setback to Angela Merkel’s Christian Democratic Union party as the election was the party’s worst performance in 70 years.  
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