Today’s podcast

https://soundcloud.com/user-291029717/risk-on-for-how-long?in=user-291029717/sets/the-morning-call

Overview: Roar

• Strong Markit PMIs on both sides of the Atlantic with US Services PMI at a record high
• Positive risk tone with equities up (S&P500 +1.1%) along with yields (10yr +2bps to 1.56%)
• USD falls (DXY -0.5%) on the positive risk tone with Euro again leading (EUR +0.7%)
• Biden’s big spending agenda challenged by Manchin (D) not wanting to use budget reconciliation
• Coming this week: AU CPI, FOMC, US GDP, EZ GDP, China PMI, BoJ, OPEC, Tech Earnings
• Coming up: very quiet again, German IFO, US Durable Goods, Earnings Season

“You held me down, but I got up (hey); Already brushing off the dust; You hear my voice, you hear that sound; Like thunder, gonna shake the ground”, Katy Perry 2013

Activity is roaring back on both sides of the Atlantic with the Markit PMIs surprising to the upside in the US, UK and Eurozone. Encouragingly the Services PMI is rebounding sharply with record highs being seen in Services for the US, UK and Australia. The data plays to the view of a sharp rebound in activity once restrictions and Europe’s vaccine rollout should allow that to continue in the months ahead. Equities lifted sharply on the back of the data, with positive earnings also helping. The S&P500 rose +1.1% and ended the week broadly flat at -0.1% in what was a quiet week for data. Improved risk sentiment also saw yields lift a little with the US 10yr yield +2bps to 1.56%, though again in a quiet week are little changed at -1bps. The USD remained on the backfoot with the DXY -0.5% with gains again driven by the Euro with EUR +0.7% 1.2093. Over the week the USD DXY is down -0.8% and EUR is up +1.0%. The AUD also rose against USD weakness with AUD +0.3% to end the week little changed at 0.7749.

The biggest piece of weekend news was US Democratic Senator Manchin again pushing back on Biden’s infrastructure bill as well as re-stating he doesn’t want to use budget reconciliation. Manchin told CNN that he wants a “more targeted ” version of the proposed $2.2 infrastructure package and supports the Republican proposal for a cut down $600bn counteroffer, while also previously stating he doesn’t support he extent of the proposed increase in the corporate tax rate. Note Manchin’s vote is critical if Republicans oppose bills in the Senate, and Manchin has also stated he doesn’t want to use budget reconciliation (see Politico for details). It appears an infrastructure bill appears someway off, as too does further spending plans this side of the mid-term elections in 2022.

Also important for the virus/vaccine track, but not grabbing headline was Pfizer’s CEO stating he is optimistic that the Pfizer/BioNTech vaccine would prove effective against the double mutant ‘Indian’ variant of the virus. Pfizer CEO Bourla in an AFP interview on Friday the Pfizer/BioNTech vaccine’s efficacy against the UK variant as witnessed in Israel was 97 per cent with strong efficacy also seen against the South African and Brazilian variants. Note Pfizer has not compiled sufficient data to fully assess the efficiency of its vaccine against the Indian variant. Also in vaccine news the US re-approved the J&J vaccine for use after an 11 day pause.

As for the data, US data shot the lights out with the US Services PMI lifting to 63.1 against 61.5 expected and highest in at least 11 years. The Manufacturing PMI was also strong at 60.6. New Home Sales also jumped a sharp 20.7% against consensus of 14.2%, with a sharp rebound following the severe winter weather in February which had seen new home sales fall ‑16.2%. Looking forward, a slowdown in mortgage applications since January suggest some easing will occur with such a slowdown occurring on the back of higher mortgage rates, tighter lending standards and perhaps a pivot back to the inner cities as activity starts to normalise.

Across the pond, Euro area PMIs also beat with Services at 50.3 against 49.1 expected despite the recent tightening in restrictions. Manufacturing was also strong at 63.3%. The UK PMIs also beat with Services at 60.1 v. 58.9 expected. Also out in the UK was Retail Sales for March where core sales rose 4.8% m/m against 2.0% expected and illustrative of the sharp rebound in activity as restrictions start to gradually lift.

In FX it was a story of USD weakness, as has been the case for the past week. The USD DXY fell 0.5% with the risk on mood seeing EUR outperform, up 0.7% to 1.2096. The dollar downtrend is likely to continue given the vaccine rollout in Europe is picking up with markets now starting to see the other side of the pandemic in Europe, while further US fiscal stimulus seems further and further away given Manchin (D) wants a smaller stimulus envelope in line with Republicans and is reluctant to use budget reconciliation. The Fed is also not expected to change guidance any time soon, and we will here more at this week’s FOMC meeting. Supportive of a lower USD has been the decline in US 10yr real yields which have fallen by around 18bps since late March to be -0.78%. The AUD broadly followed USD moves with the AUD -0.3% to 0.7749.

Coming up this week

A busy week in Australia with focus on Q1 CPI and Weekly Payrolls to see any impact from the end of JobKeeper:

• NAB’s CPI forecast (Wednesday): is in line with consensus at 0.9% q/q for Headline and 0.5% q/q for Core Trimmed Mean. The risks are tilted to the upside with the possibility of higher than expected rental inflation and uncertainty around the ability of retailers to pass on higher input costs. Our Core Trimmed Mean measure is also 0.54 unrounded with a low bar to rounding up to 0.6 q/q (please see NAB’s CPI Preview Update for details).
• Australian Weekly Payrolls (Wednesday): covers the first two weeks following the end of JobKeeper (data is for week ending 10 April and JobKeeper ended on 28 March). It is unclear though how much of a signal we can take from Payrolls given their tendency to be heavily revised. CPI and Payrolls are also the last key data points ahead of the next RBA Board Meeting and updated SoMP forecasts.

Offshore it’s a crowded calendar with the main highlights being the FOMC, US GDP, EZ GDP, China PMI, BoJ, OPEC, Tech Earnings.

• FOMC (Wednesday): Chair Powell will need to acknowledge the rapid rebound seen in the US economy, while also keeping guidance unchanged. The recent decline in yields has taken some pressure off the Fed, while the August Jackson Hole Symposium is started to be talked about as when the Fed may start to signal its asset tapering plans.
• US Q1 GDP (Thursday): Consensus is at 6.9% annualised and the Atlanta Fed’s GDP Now suggests upside risks at 8.3% annualised.
• US PCE Deflators (Friday): Core PCE is seen at 1.8% y/y, with base effects partly driving. Next month will also see a large base effects.
• US President Biden (Wednesday): Biden is addressing a joint session of Congress to detail his ‘American Family Plan’ and the increase in capital gains taxes that will help pay for it. The papers also report Biden is exploring a carbon import tariff that would put a levy on imports from countries with weaker climate policies.
• German IFO (Monday) and EZ Q1 GDP (Friday): The IFO should sustain recent improvement and also reflect optimism from the pick-up in the vaccine rollout. Focus then shifts to Q1 GDP figures on Friday with consensus at -0.8% q/q after last quarter’s -0.7%. Looking forward, the recent pick-up in the vaccination pace is likely to support confidence, which should also be reflected in the EZ April Confidence Surveys on Thursday. Preliminary April HICP is also due Friday and is expected to move higher.
• China PMIs (Friday): PMIs are the only data of note this week. After weaker-than-expected Q1 GDP figures, PMIs will be closely watched to confirm ongoing growth momentum. Consensus sees Manufacturing at 51.7 and Non-manufacturing at 56.0
• Earnings season also continues with around one-third of the S&P500 due to report this week. The headlines will be the big tech stocks, which include: Tesla on Monday, Alphabet on Tuesday, Facebook and Apple on Wednesday, and Amazon on Thursday.

Coming up today

A very quiet day in Australia with a few states having the ANZAC Day Public Holiday (those with a public holiday Monday are QLD, WA, SA, ACT and NT). Offshore it is also fairly quiet ahead of a big week. Germany has its IFO Survey, while in the US, Durable Goods Orders will be one of the final data pieces ahead of Q1 GDP figures on Thursday. Details below:

• EZ: German IFO – April: The IFO should broadly reflect last Friday’s German PMI with ongoing strength in Manufacturing (PMI 66.4 from 66.6) and some easing in the pace of Services given a tightening in virus restrictions (PMI 50.1 from 51.5). Consensus is for the Business Climate at 97.8 from 96.6. Expectations components should be more positive given the pick-up in the vaccine rollout.
• US: Durable Goods – March: Core durable goods orders are expected to rise 1.6% m/m after last month’s -0.9%.

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