It’s all about Inflation and the U.S Dollar

Earlier in the Day:

Economic data released through the Asian session this morning included Australia’s February AIG Manufacturing Index and 4^th quarter new capital expenditures, Japan’s 4^th quarter capital spending numbers and China’s February Caixin Manufacturing PMI.

For the Aussie Dollar, the data was negative this morning, with the AIG Manufacturing Index reporting slower growth in the manufacturing sector, with 4^th quarter capital expenditures unexpectedly falling.

For the manufacturing sector, the positives were a jump in production, with the production sub-index rising from 57.7 to 62.7 points, a pickup in new orders, the sub-index rising by 1.9 points to 58.8 points and a 3.4 point rise in the sales sub-index, pointing to a pickup in domestic sales. The negatives out of the numbers were a pullback in capacity utilization and a slower pace of hiring, with the employment sub-index falling by 0.8 points to 52.1. Inflation numbers were also disappointing, with the input price sub-index falling 1.1 points to 69.7 and the output price sub-index falling 4.2 points to 49.2. Wage growth also slowed, down 1.1 points to 59.1.

The Aussie Dollar moved from $0.77577 to $0.77592 upon release of the figures.

Capital expenditure fell by 0.2% in the 4^th quarter, falling short of a forecasted 0.9% increase, following a 3^rd quarter revised 1.9% rise, with the mining sector weighing heavily, down 4.7%, while manufacturing investment rose by 2.6%. Adding to pressure on the Aussie Dollar was a weaker than forecasted forward estimate for capital expenditure.

The Aussie Dollar moved from $0.77546 to $0.77396 upon release of the figures, which are expected to lead to a downward revision to 4^th quarter growth figures.

For the Japanese Yen, capital spending increased in the 4^th quarter in Japan, rising by 4.3%, following a 3^rd quarter 4.2% increase, which was better than a forecasted 3.1% rise.

The increase in spending has been supported by strong demand for Japanese goods, with trade continuing to be a key contributor to Japan’s economy. By sector, the manufacturing sector increased capital spending by 6.5%, while the nonmanufacturing sector recorded a 3% increase.

The Japanese Yen moved from ¥106.686 to ¥106.625 against the Dollar upon release of the figures, with the moves coming more from an early sell-off in the equity markets than in response to the data. At the time of writing the Yen was down 0.13% to ¥106.82 against the Dollar.

Following the disappointing private sector PMI numbers out of China on Wednesday, this morning’s Caixin manufacturing PMI provided some more positive news for the markets, with the PMI rising from 51.5 to 51.6, coming in ahead of a forecasted 51.3.

Despite the better numbers, softer production in February was the negative, though this will have been influenced by the Chinese New Year, with the good news being an increase in total new work, with business optimism hitting an 11-month high.

The Aussie Dollar moved from $0.77274 to $0.77320 upon release of the figures before, down 0.39% for the day.

In the equity markets, it was a mixed bag through the early part of the day, with the Nikkei down 1.37% and the ASX200 down 0.76%, while the Hang Seng and CSI300 were up 0.23% and 0.90% respectively, supported by the better than expected manufacturing numbers.

The Day Ahead:

For the EUR, economic data through the morning includes February’s finalized manufacturing sector PMI numbers together with the Eurozone’s January unemployment rate.

Softer numbers out of Italy could add some further pressure on the EUR ahead of the Italian general election on Sunday, with the markets also wary of the SPD ballot on the grand coalition, the results also out on Sunday.

Weaker inflation figures released on Wednesday have certainly pinned back the EUR this week, the numbers coming off the back of Draghi’s negative views on inflation at the start of the week, leading to the EUR falling back to $1.21 levels for the first time since mid-Jan. At the time of writing, the EUR was flat at $1.2194.

For the Pound, it’s been quite a week, with concerns growing over the British government’s ability to negotiate a favourable agreement with the EU on trade and the transition period.

How negotiations go will ultimately dictate how sensitive the Pound will be to economic data in the coming months, with the markets having started to price in a May rate hike. If the British government fails to get the upper hand at the Brexit table, we could see the chances of a May rate hike evaporate and Pound strength with it.

Economic data out of the UK this morning is limited to February’s manufacturing PMI, which will influence, though there will be plenty of focus on Brussels and Theresa May ahead of tomorrow’s speech.

At the time of writing, the Pound was down 0.09% to $1.3748, its weakest level since mid-January.

Across the Pond, it’s another big day for the Dollar, with the FED’s preferred Core PCE Price Index figures scheduled for release, alongside personal spending and the weekly jobless claims figures, while manufacturing PMI numbers are scheduled for release later in the day.

Focus will primarily be on the inflation numbers, with the markets likely to be on edge ahead of the release. Any pickup in the core PCE price index figures and we will expect a strong response from the Dollar, while a pullback is more than likely should the numbers be in line with or worse than forecasts.

On the manufacturing numbers, the market’s preferred ISM survey figures will be of greatest influence, with the forecasted numbers being Dollar positive, though looking at the Chicago PMI numbers released on Wednesday, forecasts may be overstated.

The Dollar Spot Index was up 0.1% to 90.705 at the time of writing, with this afternoon’s inflation figures and FOMC member Dudley’s speech of particular interest.