FX News Today

China’s official manufacturing PMI improved to 50.2 in March, better than expected from 49.0 in February. The improvement leaves the index at or above the key 50 contraction/expansion threshold for the first time since the 50.0 in July of 2015. The 49.0 reading this February was the weakest reading since a matching 49.0 in November of 2011. The move back into (very modestly) expansionary territory is good news, suggestive of some stabilization in China’s manufacturing sector. However, at the same time Caixin Manufacturing PMI (released by Markit Economics) is still below 50 at 49.7.

Sentiment index for Japan’s large manufacturers dropped to the lowest level in three years. Stronger yen eats into company profits, undermining efforts to revive world’s third-largest economy. The Tankan index stood at 6 in March, the Bank of Japan said today, declining from as high as 12 three months ago. A positive number means there are more optimists than pessimists among manufacturers.

Fed’s Evans echoed Yellen’s comment that continued caution is warranted on the policy path, due to low inflation (the FOMC non-voter is speaking on Bloomberg Radio). He’s projecting one hike at mid-year, and one at year-end, and reminded the FOMC could move at any meeting. The Fed is trying to be pro-active in order to avoid having to shift down to a negative interest tactic. An improvement in the outlook could speed up the pace of hikes, he noted, and added that recent inflation data have been firmer. But he believes the Fed needs to get closer to its objectives. There’s nothing really new here from Evans. When the FOMC shifted its dot plot lower to two tightenings this year, we and the market penciled in hikes in June and December (both are meetings that include press conferences).

Eurozone March HICP inflation came in at -0.1% y/y yesterday. Inflation remains stuck in negative territory, but core inflation is rising again and the gap between the rates across the four largest Eurozone countries is also widening. At the same time, energy prices remain the key factor behind negative rates, with no real signs of a deflationary spiral. German headline rates are back in positive territory and with the ECB continuing to add stimulus, the risk of property bubbles and regional inflation overshoots in the medium term are also picking up.

 

Main Macro Events Today

• UK Manufacturing PMI: The UK manufacturing PMI is due today and is expected to come in at 51.2 showing some improvement after much weaker than expected number in the February survey. In February PMI dropped to 50.8, down from 52.9 in January.
• US Manufacturing ISM: March ISM is out on Friday and should reveal an increase to 50.0 (median 50.6) from 49.5 in February and 48.2 in January. Producer sentiment has been rebounding sharply in March with big gains in all of the already released measures which should lend upside risk to the remaining measures of producer sentiment. The rebound is poised to bring the ISM-adjusted measure for the month up to 52 after holding at 49 for two months.

• US Employment: March employment data is out on today and should reveal a 190k headline gain following headlines of 242k in February and 172k in January. The unemployment rate should remain steady at 4.9% (median 4.9%) for a fourth month.

Janne Muta

Chief Market Analyst

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