The combination of a somewhat weaker than expected Chinese PMI, along with strong manufacturing and construction data in the US, pushed the equity markets higher, along with commodities and riskier currencies. For the trading session, the S&P 500 index climbed 24 points to close at 1125, above the 200-day moving average.
The Institute for Supply Management’s monthly gauge on manufacturing slipped to 55.5, from 56.2 in June. Despite the overall drop in the index, the actual release was better than expectations which was a reading of 54.6. Separately, construction spending rose by 0.1%, to a seasonally adjusted annual rate of $836.01 billion compared to the prior month. The Commerce Department data were surprising. Economists surveyed had expected a 0.7% decrease. May spending, however, was revised way down, dropping by 1.0% instead of the previously reported 0.2% decline. June’s spending gain was driven by public sector spending on construction, which rose 1.5%. Private construction spending during June fell by 0.6%.
One of the key fundamental developments that have helped spur the downside correction in the US dollar in recent weeks has been the divergence of economic data between the US and Europe. This trend is seemed to continue, although the US data was solid. The euro zone reading of 56.7 was a little above the flash reading of 56.5 and well above the June reading of 55.6. Of note, Spain and France surprised on the upside, while Italy was a bit softer, while Germany was spot on. While the pace of the manufacturing recovery is expected to slow by many economists, there is little evidence in today’s data. And Spain’s showing (51.6 vs 51.2) included a strong rise in the output sub-index, would seem to dilute, at least on the margins and for the moment, the IMF’s concerns expressed last week that Spain’s deficits projections were based on too optimistic of growth forecasts.
Sterling has pushed above the $1.58 level for the first time since February even though the July CIPS PMI was slightly lower than the June reading. The headline eased to 57.3 from 57.6 (initially 57.5), but was still above consensus forecasts. The pullback from the 15-year highs (58 in April and May) is quite modest. While new orders and employment sub-indices remained firm, export orders slipped to 50.8, the lowest reading since last August. The next near-term target for sterling come in near $1.5865, a retracement objective of the Nov ’09 through May’10 downdraft. Medium term trend followers also note that sterling moved above its 200-day moving average last week for the first time since January. It comes in this week in the $1.5540 area. It requires a break back below this to make sterling bulls reconsider. The euro cannot keep pace with sterling and has broken the GBP0.8300 level for the first time in a month. More stops are thought to below GBP0.8245. The unexpected strength of the UK economy and the resilience of inflation pressures spurs speculation that 1) the UK will grow faster than the US, euro zone and Japan and 2) the BOE may have to raise rates before the other major central banks. The MPC meets this week. While no one is expected a change in stance yet, the voting will attract attention as there is talk that A. Sentance, the lone dissenter, may find company.