Currencies calm after intervention storm, despite soft China PMI

More Andrew Robinson, 01 December 201101 December 2011 Non-Independent Investment Research The new month brings the usual tidal wave of manufacturing PMI data from across the globe Thursday. Most scrutinized was the China data, with both the official and HSBC equivalent on tap, following a weak flash estimate from HSBC last week and rumours in Asia yesterday of a poor “official” number.
 
In the end, the official number was soft, down to 49.0 and the first dip below the 50 contraction/expansion threshold since January 2009 with the output index at cycle lows and new export orders below 50 for the second straight month. Markets did not show much reaction to this data, if anything expressing some relief that it was not as bad as the rumoured sub-48 reading from yesterday. That did not last however as the HSBC PMI index slumped to 47.7 (flash estimate 48.0) and risk appetite started to slide with AUD bearing the brunt of the risk-off trade. AUDUSD dipped below 1.02 briefly afterwards.
 
Other data releases focused on Australia with their PMI data extending its rebound to two straight months with a 47.8 reading from 47.4, though still deep in contraction territory. In the sub-categories, the output index was up 3.7 points, exports up 6.4 points, new orders up 1.2 points and inventories up 3.5 points. The rest of the data was disappointing – retail sales rose a mere 0.2 percent m/m following 0.4 percent gains in September and 0.6 percent in August, indicating the Australian consumer is holding back spending given the uncertain outlook both globally and locally. Building approvals collapsed in October, falling 10.7 percent m/m and 29.8 percent y/y with approvals in the core private sector housing segment also declining.
 
A double whammy of major central banks announcing vast and cheaper amounts of USD liquidity and China cutting its reserve ratio requirements by 50bp led risk appetite sharply higher during the European session yesterday. Central banks from the US, Europe, UK, Japan, Switzerland and Canada lopped 50bp off the cost of USD swap transactions in an effort to ease funding strains in the global financial system. The timing of the Chinese RRR cut might suggest a coordinated approach but some suggest it was to preempt an expected very weak PMI number today. The move pushed EU fears onto the back burner with equities and risk currencies enjoying a field day, with the usual month-end volatility swallowed up by the earlier moves.
 
To cap it all off, US data releases looked encouraging on the headline with the fore-runner to Friday’s NFP, the ADP employment change, posting its biggest monthly gain since February. The Chicago PMI also beat expectations with a rebound to 62.6 from 58.4 last with 58.5 expected while the NAPM Milwaukee reading also firmed to 56.7 from 55.5. October’s pending home sales were also firm at