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Eurozone PMIs in May Signal Growth in 2Q16 should Ease Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Mon May 23 16 08:24 ET

Flash manufacturing PMI from the Eurozone sent a mixed signal of the region's economic growth. Headline reading for the bloc as a whole slipped -0.2 point to 51.5 in May. The market had anticipated improvement to 51.9. The PMI Composite Output Index dropped -0.1 point to 52.9, the lowest level in 16 months. Manufacturing PMI for Germany surprisingly rose to a 5-month high of 52.4 in May from 51.8 a month ago, while that for France dropped to 48.1 from 48.3 in April This was the lowest level in 13 months. The disappointment from Eurozone's PMI raised concerns that the acceleration in growth in 1Q16 might prove temporary. Markit estimated that such PMI reading suggests GDP growth might reach only +0.3% in the second quarter. As mentioned in the statement, Markit suggested that "growth is more likely to weaken further than accelerate. Inflows of new work showed the smallest rise for nearly a year-and-a-half, while optimism about the business outlook in the service sector sank to its lowest since July 2015".

Despite the better-than-expected headline reading in Germany, Markit warned that investors should "not be too complacent about these numbers". It added that the reading might have been boosted by the fact that "some companies raised activity levels in order to process backlogged work, rather than as a result of rising new business. Although new order intakes continued to increase, the rate of growth was the weakest in ten months, with occasional mentions from panellists of an increasingly challenging demand environment.

As speculations of Fed funds rate hike in June have increased since the moderately more hawkish FOMC minutes, the focus this week is on Fed presidents' speeches. Speaking in China today, St. Louis Fed President James Bullard (hawk, voter) suggested that the labor market is tightening despite low participation. According to him, "labor markets are relatively tight. This may put upward pressure on inflation going forward…This is an important factor supporting the FOMC view on the expected path of the policy rate". San Francisco Fed President Williams affirmed over the weekend that rate decisions would be based solely on data and analysis and there had been evidence that the Fed "can act in presidential election years". For the rest of the week, Philadelphia Fed President Harker will be speaking later today while Fed Chair Yellen will deliver her speech on Friday.

On the dataflow, US new home sales due Tuesday probably show a +1.76% gain to 520K in April. Wednesday comes the advance trade in goods balance for April and Markit's service sector PMI, followed by Thursday's preliminary durable goods orders survey for April, pending home sales and the Kansas City Fed's manufacturing survey for April. The second estimate of US GDP growth for 1Q16 would be released on Friday. In Canada, the BOC meeting on Wednesday would unlikely bring any change in the monetary policy. The tone in the accompanying statement would be the key.

Commitments of Traders:

Speculators were mixed over the energy complex in the week ended May 17. Net LENGTH for crude oil futures soared +76 809 contracts from a week ago to 368 769 while net LENGTH of gasoline dropped -1 607 contracts to 69 930. Meanwhile, Net LENGTH for heating oil slid -251 contracts to 8 402 while net SHORT for natural gas decreased -2 132 contracts to 132 455.

Similarly, speculators were mixed over the metal complex last week. Net LENGTH for gold futures reversed last week's loss and added +1 390 contracts to 266 288 while that for silver futures dropped -3 069 contracts to 77 202. For PGMs, net LENGTH for platinum increased +1 027 contracts to 39 404 while that for palladium slid -410 contracts to 6 344.


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