- Markit U.S. manufacturing PMI expected to show a back-to-back increase in April in a sign of improving manufacturing confidence
- ECB leaves its policy unchanged with zero/negative interest rates as far as the eye can see
Markit U.S. manufacturing PMI expected to show a back-to-back increase in April in a sign of improving manufacturing confidence — The market is expecting today’s preliminary-April Markit U.S. manufacturing PMI to show an increase of +0.5 to 52.0, thus producing a back-to-back gain when combined with March’s +0.2 point increase to 51.5. The Markit U.S. manufacturing PMI has been weak in recent months and March’s level of 51.5 was only +0.3 points above the 3-1/2 year low of 51.2 posted in Dec 2015.
The ISM manufacturing index took a harder hit than the Markit index did last year and has therefore done a better job of rebounding higher in the past several months. The ISM manufacturing index has risen for the last three months (Jan-March) by a total of +3.8 points to post a new 8-month high of 51.8, which was +0.3 points above the March Markit manufacturing index of 51.5. The ISM new orders sub-index has performed even better than the overall ISM index, surging by +9.5 points in the past three months to post a new 1-1/3 year high of 58.3, indicating that the orders pipeline is filling back up nicely.
The April business confidence data that has been released thus far has been mixed. The Empire manufacturing index in April rose by +8.94 points to 9.56, adding to March’s sharp +17.26 point increase to 0.62. However, yesterday’s April Philadelphia Fed index fell by -14.0 to -1.6, giving back nearly all of March’s +15.2 point surge to 12.4.
ECB leaves its policy unchanged with zero/negative interest rates as far as the eye can see — EUR/USD temporarily rallied yesterday when the ECB announced that it had left its monetary policy unchanged since there had apparently been some market participants who had been hoping that the ECB might announce additional stimulus measures. The ECB yesterday left its refinancing rate at zero and its deposit rate at -0.40%.
However, EUR/USD then fell back as ECB President Draghi made clear that the ECB would be pursuing its uber-easy monetary policy for many years into the future. The ECB’s 80-billion-euro-per-month QE program is currently scheduled to last another year (until March 2017) and the ECB could eventually extend QE even farther out into the future if the ECB’s inflation and economic targets are not met. On interest rates, Mr. Draghi said yesterday that “we continue to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases.” That means no interest rate hike for a period of years.
Mr. Draghi yesterday pleaded with the markets to show some patience, saying “Our policies work, they are effective — just give them time.” Mr. Draghi also responded to criticism of the ECB from Germany’s finance minister and other German politicians complaining about the impact of zero interest rates. Mr. Draghi warned that criticism of the ECB simply adds to the Eurozone’s problems. Mr. Draghi said, “Any time the credibility of a central bank is perceived as being put into question, the result is a delay in the achievement of its objectives — and therefore the need for more expansion.” Mr. Draghi was essentially telling German politicians, if you want even more negative interest rates and expanded QE, then go ahead and keep criticizing the ECB.
The ECB in June will start buying corporate bonds in an effort to suppress corporate bond yields and expand the range of securities that it can purchase for its massive QE program. The QE program will total about 1.7 trillion euros by the time it is scheduled to end in March 2017. The 10-year Bund yield yesterday rose by +9 bp to 0.24% after the ECB detailed its corporate bond purchase program because of the idea that ECB demand for sovereign bonds will be lower when the ECB starts purchasing corporate bonds in June. The ECB will be buying the bonds with maturities of 6 months to 30 years of insurance companies and non-bank corporations, i.e., just about all corporate bonds except for bonds issued by banks. The ECB cannot reasonably buy bank bonds because then it would be a creditor of institutions it is charged with regulating, thus posing a clear conflict of interest.
The Eurozone economy is holding its head above water but continues to have difficulty gaining any upside traction. The main obstacle at present is the June 23 Brexit vote in Britain since a vote in favor of UK leaving the EU would be disruptive to European trade flows and could cause financial contagion. After year-on-year GDP growth of +1.6% y/y in the last three quarters of 2015, the market is now expecting Eurozone GDP to ease to +1.4% y/y in the first three quarters of 2016.
Meanwhile, the ECB is not making any real progress on pushing inflation up towards its target of just below 2%. The market consensus is for the Eurozone CPI to be at zero in the first half of 2016, then slowly rising to +0.4% y/y in Q3, +0.8% in Q4, and +1.4% in the first half of 2017.
