U.K. government bonds rose after a report showed manufacturing grew at the slowest pace in 17 months, while the euro area’s economic slump curbed demand.
Sterling strengthened versus the euro before the European Central Bank announces its rate decision tomorrow amid speculation policy makers will signal they’re willing to provide more stimulus to support a faltering economy. Markit Economics’ Purchasing Managers’ Index fell to 51.6 in September from 52.2 in August, the lowest since April 2013. David Miles, one of the nine members of Bank of England’s Monetary Policy Committee, said yesterday any rate increase will be gradual.
“The U.K. economy might be growing, but recent data suggested things may have petered out a bit,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London. “The euro region’s economy being where it is posts a risk on the U.K.’s. That may delay a rate increase, which will be supportive for gilts.”
The resurgent U.S. dollar has trumped most major currencies in its march higher, not least the Japanese yen, whose recent slide against the greenback is raising policymakers’ eyebrows.
The dollar-yen spiked to a six-year high of 106.33 on Tuesday. The move triggered warnings by Finance Minister Taro Aso and Economics Minister Akira Amari, who cautioned that further sharp declines in the currency are not desirable.
The yen’s near-term outlook hinges on the direction of the U.S. dollar, say analysts, who expect further downside. The greenback has stormed higher on a strengthening American economy and the prospect of higher U.S. interest rates as the Federal Reserve unwinds its easy monetary policy. The dollar index is up 5.2 percent so far this year.
Benchmark U.S. Treasurys yields held near their highest levels in over a month on Tuesday after the Treasury Department auctioned $27 billion in three-year notes at a high yield of 1.066 percent, the highest yield since April 2011. The bid-to-cover ratio, an indicator of demand, was 3.17.
Foreign central banks and other indirect bidders bought 33.11 percent at the latest three-year note supply, their smallest share since June. Large money managers, smaller bond dealers and other direct bidders purchased 20.27 percent of the three-year supply, which was higher than the 19.03 percent they bought in August.
Primary dealers or the 22 top Wall Street firms that do business directly with the Federal Reserve bought 46.63 percent of the supply, which was larger than August’s 44.77 percent. Benchmark 10-year U.S. Treasury notes were last down 7/32 in price to yield 2.50 percent, slightly below an earlier session high of 2.51 percent, which was the highest yield since August 5. Meanwhile, U.S. 30-year Treasury bonds were down 4/32 in price to yield 3.23 percent.
Japan’s core machinery orders, a leading indicator of capital spending, rose for the second straight month in July but fell short of expectations. Core machinery orders rose 3.5 percent on month, below expectations for a 4.0 percent rise in a Reuters poll and down from an 8.8 percent rise in June, government data showed on Wednesday.
On a year-on-year basis machinery orders rose 1.1 percent, better than expectations for a 0.6 percent rise and up from a 3 percent decline in June. “[While] we had expected a 5 percent increase month-on-month today’s result is not pessimistic,” said Junko Nishioka, chief Japan economist, RBS Securities Japan. “Japanese manufacturers are retrieving a growth trend in the second half of this year.”
The figures came after Japan revised its second quarter gross domestic product (GDP) reading lower on Monday. The revised figure showed the economy contracted an annualized 7.1 percent, worse than an initial reading of 6.8 percent, marking the biggest contraction since the first quarter of 2009 as a hike in the consumption tax dragged economic growth.
Euro-area manufacturing and services activity strengthened in a sign of confidence that further stimulus by the European Central Bank will consolidate a fledgling economic recovery.
A Purchasing Managers Index for both industries jumped to 54 in July from 52.8 in June, matching a three-year high reached in April, London-based Markit Economics said today. That’s the 13th month the gauge has exceeded 50, the mark that signals expansion. Economists predicted an unchanged reading of 52.8, according to the median of 22 estimates in a Bloomberg News survey.
The pickup comes after policy makers introduced a negative deposit rate and targeted loans to bolster lending, growth and an inflation rate running at a quarter of the ECB’s goal. While risks to the economic outlook have increased with escalating tensions in the Middle East and Ukraine, strengthening manufacturing in China bodes well for export demand.
Japanese Economics Minister Akira Amari warned that it would be premature for the Bank of Japan to consider an exit strategy from its massive stimulus program, voicing hope instead for further monetary easing if achievement of its inflation goal falls behind schedule.
Amari also said that while Japan appears to be emerging from years of persistent price declines, it was too early to formally declare a sustained end to deflation with the economic recovery still vulnerable to external shocks.
“The BOJ has expressed strong determination that it won’t hesitate to take further action if (the timing for meeting the inflation target) is not on schedule,” Amari said in an interview at a Reuters Newsmaker event on Friday.
“If the BOJ judges that it’s not on schedule, I think the central bank will decide on its own (to act),” he said.
The central bank has kept policy unchanged since deploying an intense burst of monetary stimulus in April last year, when it pledged to double base money via aggressive asset purchases to accelerate inflation to 2 percent in roughly two years.
With Japan only halfway to meeting that target, the BOJ is set to keep its stimulus plan intact well into next year, in contrast to its U.S. and British counterparts, which are starting to telegraph plans for interest rate hikes.
Japanese exporters looking to boost shipments after the first monthly decline in more than a year can’t rely on a weaker yen for support, according to economists led by Mary Amiti of the Federal Reserve Bank of New York.
While depreciation typically favors exporters, a decline in the yen would boost the cost of the fuel imports needed by Japanese companies to manufacture products, according to a post today on the New York Fed’s Liberty Street Economics blog.
“Yen depreciation drives up the marginal costs of Japanese exporters,” Amiti wrote, with Oleg Itskhoki of Princeton University and Jozef Konings at University of Leuven. This “results in a smaller share of the depreciation being passed on into their export prices.”
Job creation in the private sector was disappointingly slow in May, with companies adding just 179,000 positions, according to the latest reading from ADP and Moody’s Analytics.
Economists in a consensus survey expected ADP’s national employment report to show the economy created 215,000 private payrolls in May, down from the prior month’s 220,000 figure.
The number could cause economists to ratchet down the projections for Friday’s nonfarm payrolls report, which is projected to show an addition of 210,000 positions for the month. Capital Economics said in a note that the ADP report “adds to the downside risk” for its forecast of 230,000 jobs created.
Services accounted for most of the jobs, adding 150,000 to the total, while goods-producing employment increased by 29,000. Even in the services sector, though, there was weakness, with new professional and business positions tumbling to 46,000 from 75,000 in April.
Canada’s bad February job report was quickly forgotten after Friday’s reported March surprise. The land with “the loonie” added +43k new jobs last month, the biggest increase in seven-months, which now pushes the six-month average to +10k. On the face of it, the double-digit print is not considered that bad given the subdued fundamental reporting of late. Digging deeper, about a 1/3rd of those gains came in the private sector, which suggests that there is room for improvement. Businesses are now beginning to ramp up hiring and investments to take advantage of the country’s weaker currency. The CAD is currently underperforming outright against its largest trading partner south of the 49th parallel ($1.0980).
A small concern is that most of last month’s job growth was due to a bounce-back in part-time jobs. The +30k rise follows two month’s of negative reporting. In the good’s sector, employment fell -15.6k, with manufacturing taking the brunt and reporting -9.2k job losses. Analysts note that this seems to contradict the apparent positive momentum in the sector – for instance the jump in exports for the month of February.
The loonie managed a hearty rally against the dollar immediately after the strong domestic report, but succeeded in giving back a third of its advance after the market digested the strong NFP report in detail. Not doing the CAD any favors was the softer than expected Canadian Ivey PMI print (55.2 vs. 58.3). The volatility in the pair remains confined, piggybacking the Fed’s strong conviction of draining their excess liquidity while Governor Poloz at the BoC policy is seen as firmly stuck in neutral.
- Canada Adds 43,000 Jobs in March
- US Economy Adds 192,000 Jobs in March
- Canada Reports Trade Surplus For First Time in 5 Months
- US Jobless Claims Rise to 326,000
- Roubini Says That Markets Are Underestimating Risks
- US Mortgage Applications Fall In Last Week of March
- US Private Sector Added 191,000 Jobs In March
- High Frequency Traders Exiting Equities Into FX Markets
- Apartments In New York Hit New Record High
- Bank of Canada To Lag US Fed Rate Hike Schedule
- Major Economics Slow Down in First Quarter of 2014
- US Manufacturing Posts Strong Growth in March
- Commodities Biggest Winner In Q1 Versus All Traditional Asset Classes
- USD Weakness Seen Ahead Of ISM Manufacturing Data
- Gold Drops to Six Week Low on Central Bank Heavy Week
* JPY Bank of Japan Monetary Policy Statement * GBP NIESR Gross Domestic Product Estimate * USD Fed Releases Minutes from March FOMC * GBP Bank of England Rate Decision * GBP BOE Asset Purchase Target * CNY CPI * EUR German Consumer Price Index * USD U. of Michigan Confidence
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Bank of Japan Governor Haruhiko Kuroda expressed confidence Friday that Japan will achieve its target of 2 percent inflation.
“Japan’s economy has been following a path toward achieving the 2 percent price stability target as expected,” Kuroda said during his speech at the London School of Economics and Political Science. “Of course, we are only halfway there and will steadily pursue the QQE (quantitative and qualitative monetary easing).”
Delivering his speech in English, he said, “Japanese firms that originally were equipped with excellent technologies and human capital have started to take on new initiatives again, and the economy and prices have changed dramatically…The day that Japan’s economy can contribute more and more to the global economy is at hand.”
After Kuroda took up his post on March 20 last year, the central bank introduced a set of monetary easing measures in April aimed at hitting the 2 percent inflation target to beat deflation, including additional purchases of government bonds and higher-risk financial assets such as exchange-traded funds.
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