China Data Disappoints with the FED Unable to Resuscitate the USD

Earlier in the Day:

Economic data released through the Asian session included January manufacturing sector data out of Australia and China, together with Australia’s building approval numbers for December.

For the Australian manufacturing sector, the index rose from 56.2 to 58.7 in January to mark the 16^th consecutive month of expansion, the longest run since 2005.

In January, all of the 7 sub-indexes expanded, with only the employment sub-index expanding at a slower pace than in December, though the slowdown was marginal, down 0.8 points to 52.1.

The production sub-index saw the largest increase, up 5 points to 62.7, sitting well above the 12-month average, with new orders rising by 1.9 points to 58.8, suggesting that activity will likely remain robust through the 1^st quarter.

On the negative side, input and output prices were on the slide, with selling prices falling 4.2 points to 49.2, with average wage growth also slowing, down 1.1 points to 59.1, the combination of which will be of some concern to the RBA.

The Aussie Dollar moved from $0.80588 to $0.80579 upon release of the figures, with the sub-text a negative for the AUD.

While manufacturing sector activity was on the rise, building approvals slumped in December, down 20% to more than reverse November’s 11.7% gain according to the ABS, with the decline being attributed to a 39.2% slide in approvals for private sector dwellings excluding houses. A 1% increase in the approval for private sector houses was just not enough to offset the slump in approvals for apartments.

In spite of the weak numbers, the Aussie Dollar managed to hold its ground, easing from $0.80624 to $0.80557 upon release of the figures.

Of greater significance this morning was China’s manufacturing sector PMI number for January that showed sector activity holding at the same pace as at the end of the year, with a continued increase in new orders and export sales, albeit at a slower pace, key takeaways from the survey.

Falling employment and rising new orders have contributed to backlogs hitting the highest levels since early 2011 according to the Markit Caixin survey, with business optimism over the year ahead hitting a 4-month high.

At the time of writing, the Aussie Dollar was down 0.17% to $0.8041 pressured by a narrowing of yield differentials, with the Yen down 0.13% to ¥109.33 against the Dollar.

In the equity markets, it was a mixed back through the session, with the Nikkei and ASX200 gaining 1.45% and 0.87% respectively, while the CSI300 and Hang Seng saw red, with declines of 1.43% and 0.42% respectively, with the January PMI number out of China doing little to support the pair, while PMI numbers from elsewhere impressed.

The Day Ahead:

Economic data out of the Eurozone this morning includes finalized January manufacturing PMI numbers, which will provide some direction for the EUR, with the markets likely to focus on new order, employment and wholesale price figures.

January inflation numbers out of the Eurozone have been disappointing this week and will need to start showing some upward trends for the markets to become more convinced of the ECB taking a more hawkish stance on policy.

At the time of writing, the EUR was up 0.04% to $1.2419, with Dollar weakness continuing to be the EUR’s nemesis.

Across the Channel, economic data out of the UK this morning includes January house price figures and the all-important January manufacturing PMI.

While we will expect the house price numbers to impact on UK property stocks, which were under pressure on Wednesday, the manufacturing PMI number will be the key driver for the Pound. December’s PMI had reported a solid increase in new orders, with new export sales on the rise on improving demand from Europe, the U.S, China and the Middle East, suggesting that there should be an uptick in January.

The markets will also focus on inflation figures within the report, with BoE Governor Carney having talked up the UK economy earlier in the week, raising the prospects of another rate hike should inflationary pressures not ease over the near-term.

At the time of writing, the Pound was down just 0.01% to $1.419, with today’s PMI number and sentiment towards the Dollar key drivers, as the British government prepares for the EU negotiating table.

Across the Pond, Dollar weakness prevails, in spite of a more hawkish FOMC statement and statesmanlike State of the Union speech by the U.S President, with the Dollar Spot Index down 0.06% to 89.076 at the time of writing.

Economic data out of the U.S this afternoon will provide some direction for the Dollar, with 4^th quarter unit labour cost and nonfarm productivity figures, together with the market’s preferred ISM manufacturing PMI scheduled for release. An uptick in unit labour costs and a relatively stable PMI would be Dollar positive. Gains are unlikely to last ling however, as market sentiment towards the government debt ceiling continues to weigh, with the government funding extension now coming back into the line of sight.

There’s plenty for the U.S administration to do in order to resolve the government funding issue and that’s before considering Trump’s plans for infrastructure spending, which will add more pressure on the Dollar.