Overnight Sentiment: Closed

Looking at your screens and seeing nothing but black? Don't worry, your internet feed did not get cut - it is just that virtually everyone else in the world is taking today off (although judging by recent volumes one could be forgiven to assume that it is "just another day"). Which is not to say that nothing is happening, with a surprising bigger than expected rate cut (50 bps to 3.75%) by the RBA crushing AUD longs overnight, and a Manufacturing ISM on deck which is far shakier now than it was before yesterday's major PMI miss. Compounding the concerns was a UK PMI print just barely above contraction territory at 50.5, below expectations of 51.5, down from 52.1. Finally, expect another record bout of GM channel stuffing which continues to be the only "shining" aspect of the now inflecting US recovery. To summarize with DB's Jim Reid: "Ahead of an important day, it has been a fairly quiet session for markets overnight. Most Asian markets (include Hong Kong, Singapore, Shanghai, and South Korea) are closed for Labour Day. Indeed much of Europe will be closed today. In terms of what's open overnight, the Nikkei is -1.2% but the ASX 200 is up +0.9%. China’s official PMI manufacturing inched a little higher in April to 53.3 from 53.1 in March but slightly below market consensus (53.6). For such a huge economy the Chinese official PMI series does seem to have been remarkably smooth of late as the reading has been gradually on the rise since hitting a recent low of 49.0 in November (50.3 in Dec, 50.5 in Jan, 51.0 in Feb, 53.1 in Mar, 53.3 in April). As we go to print the Reserve Bank of Australia has unexpectedly cut its key benchmark rate by 50bps to 3.75%. Indeed only 2 out of 29 economists polled by Bloomberg saw this coming. The market reacted aggressively post the announcement taking the front end bills 15-18bp lower in yields."

Full summary from Bank of America

Market action

Most equity markets are closed around the world today. Except for the Japanese Nikkei all Asian equity markets we cover were closed. The Japanese Nikkei shed 1.8% in overnight trading. Part of the sell off was due to a stronger yen that sent shares of exporters lower.

In Europe, the continent is off for May day. There is no holiday in the UK today and shares are enjoying a modest rally up 0.3%. At home, futures are pointing to a flat opening later today. Volumes should be relatively light today due to the fact that most overseas investors are on holiday today.
In bondland, Treasuries are basically flat across the curve. The 10-year yield is currently trading at 1.92%.

The dollar is marginally weaker against a basket of major currencies. The DXY index is off 0.1%. Commodities are selling off. WTI crude oil is 17 cents lower at $104.70 and gold is down $3.39 an ounce to $1,661.37.

Overseas data wrap-up

In a surprise move the Reserve Bank of Australia, the country's central bank, cut its benchmark interest rate 50bp rather than the 25bp expected by most economists. The move brought the cash rate down to 3.75% - the lowest level since February 2010. In deciding to take a bigger rate cut the bank is trying to ensure that the lower cash rate is passed on to consumer and business loans because since February lending rates have risen despite the cash rate remaining unchanged. Our Australian economist still expects another 25bp in August.

Korean exports declined 4.7% yoy in April, after declining 1.4% yoy in March. The drop was much weaker than the 1.1% yoy contraction that consensus had pulled in. Part of the drop reflects weak external demand but also reflects unusually strong exports one year ago due to the Japanese earthquake. Our Korean economist expects a slow and mild recovery in export growth later this year as the unfavorable base effects wears off and external growth regains some momentum.

First quarter GDP in Taiwan rose 0.4% yoy weaker than market expectations of a 0.9% increase and a slowing from the 1.9% yoy rate recorded in the fourth quarter. Taiwan's technical recession only lasted for 2 quarters and real GDP experienced moderate sequential expansion in 1Q12. The economy appears to be less vulnerable to the European debt crisis when compared to the previous crises: 4 consecutive quarters of contraction back in 2008 and 5 consecutive quarters of contraction during 2000/01.

Normally the first of a new month brings with it a bevy of PMI manufacturing releases from around the globe. However, holidays in both Asia and in Europe have lightened the number of releases. The Chinese PMI rose marginally to 53.3 in April from 53.1 in March. The PMI reading in April confirms our Chinese economist's call that the Chinese economy troughed in 1Q. We expect GDP growth to quicken to 8.5% yoy in 2Q from 8.1% in 1Q and we maintain our annual GDP forecast at 8.6%.

The UK manufacturing PMI fell from 51.9 in March to 50.5 in April: somewhat below market expectations of 51.5. Export orders fell particularly sharply in April, with weaker demand from the Euro area reported. With exports accounting for around 50% of UK manufacturing output and 7 of the UK's 8 largest export markets being in the Euro area, softer demand in the latter clearly poses a drag on the UK.

Today's events

Today's economic calendar includes the March construction spending report, the April ISM manufacturing survey and April vehicle sales. At 10:00 am, both the construction and ISM reports will be released. We expect construction spending to increase 0.5% in March after tumbling 1.1% in February. The weakness in February was driven by a sharp drop in private nonresidential and public expenditures - we expect a tepid bounce back in these categories. Meanwhile, the ISM Manufacturing Index is expected to moderate to 53.0 in April from 52.4 in March. While this would be consistent with expansion, it would also mean that the ISM index is essentially flat for five months. However, there are several reasons to expect a weaker ISM including yesterday's weaker than expected Chicago PMI. See Chicago PMI: Downside risk to today's ISM below.


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