News Stream Poor, Look Out Below

It is difficult to envisage a poorer stream of news that the market received earlier today.   Weak reports increase the prospects of a policy response soon.  China could cut reserve requirements this weekend.  Next week the RBA, ECB and BOE meet and the risks have increased for for action.  The issue in Australia is between a 25 and 50 bp cut.  The ECB, as we have noted, could deliver a rate cut.  The BOE may resume its gilt purchases. 

The poor China PMI (50.4 from 53.3 in April and consensus of 52.0) got the ball rolling, sending the major currencies, including the Australian dollar, lower.  A modest bounce was seen in late Asia, but the news stream from Europe triggered new selling and new lows for the euro, sterling and Australian dollar.  

The euro zone manufacturing PMI came in at 45.1, up a smidgen from the 45.0 flash, which in the grand scheme of things is nothing but rot.  Germany, which prevented a negative Q1 GDP print in the euro area, saw its reading tick up from the flash, but at 45.1 is still at a three year low.  Most telling is the drop in new orders to 43.8 from 44.9. 

The same pattern hold for France.  Small increase from the flash but details are poor.  New orders fell to 41.6 from 43.5.  Spain was particularly poor falling to 42.0 from 43.5 and expectations centered around 43.3.  It is the 13th month below the 50 boom/bust line.  New orders fell to 38.3 from 41.3.  

If there was a pleasant surprise it was in Italy and Greece where the PMI readings ticked up.  However, at 44.8 and 43.1 respectively, there absolute readings are so poor that the small rise from April is really inconsequential.  For example, new orders is Italy rose to 40.3 from 39.3 and is the eighth month below 50.  Moreover, Italy also reported a rise in unemployment to 10.2%, which was more than expected and drives home the point that Italian economy remains in poor shape.  

The UK reported perhaps the biggest negative surprise.  The manufacturing PMI collapsed to 45.9 from 50.2 in April (which had initially been 50.5).  The market consensus was for a 49.8 reading.  It is the weakest since May 2009.  New orders fell to 42.0 from 49.0.    

The euro fell to about $1.2312.  Sterling fell to $1.5270 and the Aussie to $0.9633.    Barring a horrific US jobs report, look for participants to sell into bounces that may extended toward  $1.2350-65 in the euro,  $1.5350-70 in sterling and $0.9680 in the Aussie. 

The yen is outperforming the greenback.  Yesterday's convincing break of JPY79 and the news stream has seen the dollar near JPY78.  News of a strong earthquake in eastern Japan saw the yen strengthen on the news and pushed the greenback to the session lows.  

The results of the Irish referendum should be released shortly and indications are that the fiscal pact was easily approved.  Such news is unlikely to prompt much of a market reaction.  A surprise defeat would likely trigger new euro losses.  

US jobs data is the main event ahead of the weekend now,  with the UK ready for a a holiday Mon-Tue next week.   Unless the jobs data is much below expectations,  the focus will remain on the European situation.  An as expected report will likely reinforce our view that QE3 is unlikely, despite some calls to the contrary.  NY Fed's Dudley had an opportunity to issue a dovish signal earlier this week but noted instead, as he has done recently, that the risks outweigh the benefits.  US 10-year yields are at a new record low.  Europe, as we have said, has delivered the same results if not more than QE would do.