Chinese PMI shades risk rally before Fed decision

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The week really starts in earnest today following two days of relative sideways movements as a result of poor liquidity, and a general lack of commitment on the part of traders to get involved in things before the data calendar gets going.

Overnight the general market warmth, that has caused EURUSD and GBPUSD to edge higher in the past few sessions, has cooled slightly following some traders deciding to cut bets on further US stimulus from the Fed tonight, and from a slight dip in Chinese manufacturing PMI.

The Fed is due to decide on its latest monetary policy tonight at 7pm BST, and while some people are looking for a bit of stimulus from the Fed, we think that they will be disappointed tonight. Our argument for no change from the Fed is that the US economy does not necessitate it yet. As we pointed out in Friday’s global outlook email, QE3 is largely priced in for September in the US, and recent comments from Ben Bernanke seem to suggest that the use of the US jobs market as a bellwether will continue.

Non-Farm Payrolls, rather erroneously, are the most important data point of the month and recent efforts have been around the 100k mark. A move lower towards 50k could bring the date forward. Other than that, the data in the US hasn’t been critical. Monetary policy action is all about impact; hitting something hard and fast so you don’t have to hit it again. The situation doesn’t need it just yet. September’s meeting will come with new forecasts and a press conference; if anything is going to be done it will likely be done then.

As it’s the first day of a new month we get the latest manufacturing PMIs from the world’s economies. Chinese PMI had been expected to bounce back towards the mid-50s but instead dipped to 50.1 leaving everyone a bit perplexed. HSBC’s independent figure saw a bounce back last week so while the situation isn’t terrible it has put the brakes on the risk rally this morning.

Similar figures from both core and peripheral European countries and the UK are expected to show contraction in their respective manufacturing sectors through the morning, while the later US ISM number should show some growth (50.2) although very little.

Some of the wind was also taken out of the ECB’s stimulus sails yesterday by the Bundesbank declaring that the bank’s monetary policy should focus on price stability and that there have been no talks on an ESM banking licence. The market shrugged the news off initially, but further comment through today will weigh further on risk.

Indicative Rates Sell Buy
GBPEUR 1.2719 1.2738
GBPUSD 1.5674 1.5685
EURUSD 1.2313 1.2333
GBPJPY 122.50 122.69
GBPAUD 1.4888 1.4915
GBPNZD 1.9271 1.9300
GBPCAD 1.5690 1.5719
NZDUSD 0.8124 0.8144
GBPZAR 12.88 12.93
USDZAR 8.2095 8.2529
GBPPLN 5.2282 5.2560
EURJPY 96.19 96.39

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Chinese PMI shades risk rally before Fed decision

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